The 2024‑25 Budget

Deficit Update

Under LAO Revenue Update, Budget Problem Grows by $15 Billion

The state already faces a significant deficit this year—we estimate it totaled $58 billion under the administration’s revenue forecast at the time the Governor’s budget was proposed in January. However, recent revenue collections data reflect even further weakness relative to those estimates. Specifically, our forecast is about $24 billion below the Governor’s budget across 2022‑23 to 2024‑25. All else equal, this means the budget problem is likely to be higher at the time of the May Revision. The actual increase in the state’s budget problem will depend on a number of factors, including formula-driven spending changes, most notably Proposition 98 spending requirements for schools and community colleges. (Due to specific circumstances this year, changes in revenues are unlikely to have a significant effect on the state’s other major formula-driven spending requirements, specifically related to Proposition 2.) Roughly, a $24 billion erosion in revenues corresponds to a $15 billion increase in the budget problem. This would expand the $58 billion estimated deficit to $73 billion under our updated revenue forecast.

Options to Address $15 Billion in Additional Budget Problem

If the budget problem increases by $15 billion, the Legislature will need to find a like amount of new budget solutions to ensure the budget is balanced for 2024‑25. Budget solutions include, for example: revenue increases and spending reductions (on both a one-time and ongoing basis), as well as other tools, like reserves and cost shifts. As the Legislature considers how to address this increased budget problem, we have put together a set of tables identifying one-time and temporary spending that could be pulled back or reduced in order to achieve budgetary savings. Below, we explain why we set forth these amounts as a possible first option to addressing a larger budget problem and then walk through our method for estimating the amounts potentially available in more detail.

Why Reduce One-Time and Temporary Spending?

The Legislature will weigh the implications of each possible solution—including increasing revenues and spending reductions—against others and, ultimately, choose a mix of solutions based on its priorities. We recommend the Legislature start by reviewing whether recent augmentations for one-time and temporary spending could be pulled back or reduced. We recommend this approach for two key reasons. First, when this one-time and temporary spending was adopted, it was understood that doing so would provide a cushion for future budget problems. For example, the administration frequently displayed “operating surpluses” in its multiyear forecasts excluding this type of spending—implying that the administration understood that the state could not afford all of the commitments under its own projections, but the state could afford the ongoing budget.

Second, the more the Legislature reduces one-time and temporary spending this year, the more other tools it can preserve for future budget problems. Reducing one-time and temporary spending is a “use or lose” tool for addressing the budget problem—once the funds are disbursed to recipients, pulling them back becomes practically impossible. Other tools, like reserve withdrawals and cost shifts, also can be used only once, but at any time. Saving them to deploy in the future can help the Legislature avoid cuts to ongoing services—which involve very difficult decisions. For example, in the Great Recession, the programs with some of the largest expenditure reductions were in health and human services, including to Medi-Cal, which provides health coverage to low-income individuals and the California Work Opportunity and Responsibility to Kids (CalWORKs) program, which provides income assistance to low-income individuals. Although the federal government has certain requirements for minimum state participation in these programs, California provides services well above these minimums. As a result, reductions tend to be concentrated in these areas because they are the ones where the state has the most flexibility to reduce spending without raising issues related to requirements imposed by courts, the voters, and the federal government. As such, maintaining other tools like reserves and cost shifts now could help mitigate reductions in these areas in the future.

Options Possibly Available to Reduce One-Time and Temporary Spending

State Allocated Large Shares of Surpluses to Temporary Purposes, Although Some Has Been Disbursed or Already Proposed for Reduction. Recent budgets allocated tens of billions of dollars in surpluses to one-time and temporary spending, including in 2023‑24, 2024‑25, and 2025‑26. Some spending, most notably for 2023‑24, has already been disbursed or encumbered. This means, for example, that grants have been awarded, funds have been transferred to other entities of government, and contracts or leases have been signed. (In some cases, funds have also been committed for 2024‑25 and 2025‑26, for example, through grant awards.) In addition, the Governor has already proposed pulling back much—but not all—of the undisbursed spending associated with these augmentations.

State Has Nearly $16 Billion in Recent One-Time and Temporary Spending That Could Possibly Still Be Pulled Back or Reduced. After setting aside disbursements and Governor’s budget proposals, we estimate the state possibly could pull back and reduce one-time and temporary augmentations by as much as $6.4 billion in 2023‑24, $4.1 billion in 2024‑25, and $5.1 billion in 2025‑26. Figure 1 shows the distribution of these amounts by program area, while the Appendix includes a complete list of them. These figures represent our current estimates of the amounts for which the Legislature has broad authority to make reductions, which could help the state address a larger budget problem in May. (In some cases, however, further disbursements could occur between now and May, such smaller amounts would be available for reduction at that time.)

This Information Reflects Our Best Current Understanding. While these estimates reflect the best information we have available, in many cases we do not have perfect information from the administration about the current status of funds. As such, we would view this list as a starting place for the Legislature as it begins crafting the final budget package. For any specific reductions, particularly in 2023‑24, the Legislature could ask the administration for detailed and up-to-date information on disbursements and encumbrances.

More Could Be Pulled Back From Earlier Years. For the purposes of this analysis, we only reviewed disbursements and encumbrances authorized for 2023‑24 and later. There is, however, additional spending attributable to 2022‑23 and earlier that has not yet been disbursed. The Legislature could ask the administration to provide information about the amount of unspent funds from these earlier years.

Appendix Tables