The Legislative Analyst’s Office (LAO) released its annual fiscal outlook on Nov. 16, revealing an estimated $25 billion budget deficit in the coming year, with the impact on Proposition 98 blunted by the availability of reserve funding. Released every fall, the Fiscal Outlook gives the LAO’s assessment of the state budget conditions for upcoming years (including revenues, potential surpluses and the conditions for schools under Proposition 98) and helps to shape the budget proposals being developed by the Legislature and Governor.
Slowing revenues lead to projected deficit
In stark contrast to the last two years, revenues are weighed down by a slowing economy, the impacts of inflation and interest rate increases undertaken by the Federal Reserve. The LAO estimates that the state will face a budget deficit of $25 billion in the coming budget year, 2023–24, reflecting projected drops that will place revenues $41 billion below the budget act projections covering the three-year period from 2021–22 through 2023–24.
While the Legislature has access to roughly enough general purpose reserve funds to make up the difference in 2023–24, the LAO cautions that those funds should be kept back for use in a possible recession. They recommend that the Legislature plan the 2023–24 budget without general purpose reserve dollars and instead identify recent program augmentations that can be paused or delayed.
Impact on Proposition 98 lessened by reserve funds in 2023–24
The impact on schools and community colleges is lessened in large part by the availability of funds from the Proposition 98 Reserve. The outlook projects that the Proposition 98 funding requirement is $108.2 billion for 2023–24, a decrease of $2.1 billion, or 2 percent, from the enacted 2022–23 level. Despite this, the LAO reports that the state can afford to maintain its existing school and community college programs in 2023–24 and provide a partial cost‑of‑living adjustment (COLA) of up to 8.38 percent. Statutory COLA is currently estimated to be 8.73 percent, with final numbers to be determined in the spring.
The availability of $7.6 billion to fund increases is due to the expiration of one-time funding, program cost declines based on declining enrollment, and a constitutionally required withdrawal from the reserve that will supplement Proposition 98 funding.
The LAO projects that over the next several years, a combination of growth in the Proposition 98 guarantee and required reserve withdrawals will cover the statutory COLA, but with very little breathing room and at the possible cost of exhausting reserves in 2025–26. The report provides several suggestions to reduce ongoing expenditures to create a larger budget cushion, including reductions to the Expanded Learning Opportunities Program (ELOP), reducing the size of the COLA, and advancing the Legislature’s policy priorities through oversight rather than new investment in the coming budget year.
The LAO’s projections will inform the 2023–24 budget planning happening now in the Legislature and the Newsom Administration. In response to the release, Assembly Speaker Anthony Rendon (D-Lakewood) issued a statement that the Assembly “will protect California’s historical school funding gains, as districts must continue to invest in retaining and recruiting staff to help kids advance and recover from the pandemic.” Likewise, Senate President Pro Tempore Toni Atkins (D-San Diego) issued a statement that “we are confident that we can protect our progress and craft a state budget without ongoing cuts to schools”.
CSBA Governmental Relations staff will continue to provide updates and engage with the Legislature and Gov. Gavin Newsom as they plan the 2023–24 budget in advance of the January release for the Governor’s budget proposal.