By Chris Reefe, CSBA Legislative Director
On Nov. 20, the state’s nonpartisan Legislative Analyst’s Office (LAO), which serves the State Legislature as a policy and fiscal advisor, released its annual fiscal outlook for the 2025–26 state budget. Slightly higher state revenues driven by continued stock market growth means the LAO’s assessment offers a brighter picture than last year’s dismal forecast, but storm clouds remain on the horizon due to weakness in the overall state economy, the unpredictability of future tax revenues, and fiscal pressures that are problematic for local educational agencies.
An important tool for the Legislature, the LAO’s fiscal outlook provides the Assembly and the Senate, as well as the public, an independent and critical analysis of the state budget, its revenues and what to expect as Gov. Gavin Newsom prepares the release of his January Budget Proposal. The report provides a valuable assessment of the state’s financial health for the current budget year and into the near future. This year’s fiscal outlook also marks a return to the traditional budget timeline when compared to 2023, when the LAO and the state were flying blind due to the seven-month delay in federal and state tax filings. The delayed tax filings presented unprecedented budgetary challenges — forcing the state to use projected, and ultimately overly optimistic, revenue estimates rather than actual revenue receipts to adopt the 2023–24 budget.
State’s budget deficit will persist
Due to proactive steps taken by the state earlier this year to reduce the size of its operational deficit, the state budget is “roughly balanced.” As noted in its outlook, the LAO acknowledges that, to date, state revenues are running ahead of both budget revenue estimates and the broader state economy. Yet, it includes a tempered with caution that the state cannot safely rely on those revenues continuing to keep up with spending obligations because of its disproportionate reliance on higher-income earners and the continued growth in the stock market.
This leads to the more important issue — state costs continue to exceed what revenues it may receive over the coming years. Although steps were taken to significantly reduce the state’s operational budget deficit, it did not eliminate it. As a result, the state is likely to see the deficit grow again in the 2025–26 budget year. This will have a direct impact on the incoming Legislature as they begin the 2025–26 legislative session. It will have to contend with the likelihood that any new additional spending will exacerbate the state deficit.
Proposition 98 Guarantee increase will benefit reserve
The LAO estimates that the Proposition 98 Guarantee will increase by $3 billion in the current budget year and by another $1.5 billion in the coming budget year to $116.8 billion. This growth reflects increased property tax revenues as well as the rise in transitional kindergarten enrollment. According to the LAO, because much of the current-year growth is attributed to capital gains revenue, the entirety of the current year’s estimated increase will be required to be deposited into the Prop 98 Reserve, which could bring the reserve to $3.7 billion.
COLA estimate and ongoing Prop 98 funds
The LAO estimates that the cost-of-living adjustment (COLA) could be 2.46 percent. Combined with the freeing up of $3.7 billion in 2025–26 due to the expiration of one-time spending and other factors, which is separate and apart from the growth in Prop 98, the LAO suggests this could allow the state to use this money to eliminate the K-14 funding deferrals included in the current 2024–25 budget. This would align with CSBA’s budget advocacy, as the association’s fall budget letter to the Governor and Legislature specifies that if sufficient funding becomes available, the state should retire the deferrals.
As CSBA’s Governmental Relations team continues to assess the impacts of the budget on California public schools, it will keep members informed on developments and opportunities to advocate on behalf of students.
