California's Legislative Analyst's Office and the Value of Independence

Providing the Legislature with a clear picture of the state’s budget condition and the fiscal choices it faces is a cornerstone responsibility of the Legislative Analyst’s Office (LAO). Our office’s independent revenue and expenditure estimates are central to fulfilling this role. The first of our estimates for the approaching budget cycle will be presented in our Fiscal Outlook, due to be released next week. The goal of this report is to give the Legislature our independent estimates and analysis of the state’s budget condition as lawmakers begin planning for the 2025-26 budget.

Inevitably, our estimates will differ to some degree from those prepared by the Department of Finance (DOF) and included in the Governor’s budget, released each year in January. Such differences reflect in part the differing roles of our office—serving the Legislature—and the Department of Finance—serving the Governor. While our assessment provides the Legislature a starting point for deliberation, the administration’s assessment integrates the Governor’s proposals. As such, our independent fiscal assessment underlies the Legislature’s ability to assert an informed check on the executive branch, making any added complexity from diverging estimates a worthwhile trade-off.

Establishing Baseline Expenditure Estimates: a Key Step in Fiscal Planning

When developing our fall fiscal outlook for the state, we begin by estimating the expenditure baseline. This reflects the projected cost of maintaining current state government programs and services under existing laws and policies, before considering the fiscal effects of any new policy decisions. Our approach can be thought of as forming baseline estimates from behind a political and policy “veil of ignorance,” to borrow a concept from philosopher John Rawls. This approach gives the Legislature at the outset of the budget process a clear assessment of state fiscal resources as it considers its options and the trade-offs of the Governor’s proposals.

An independent assessment of the state’s existing spending commitments helps equip the Legislature to consider the full scope of the fiscal choices before it—critical insight for the branch of government with constitutional authority over appropriations. Given that we and DOF operate independently and have different roles in the budget process, our interpretations of “current law and policy” also frequently differ to some degree. These lead to differences in our baseline projections, which in turn lead to differences in our assessments of the state’s fiscal position. Although these differences may seem like budgetary technicalities, they reflect the differing purposes and roles of our offices. The value we aim to offer the Legislature is an impartial analysis of the state’s fiscal position so the Legislature can weigh its options, and those proposed by the Governor, with a clear view.

Independent Revenue Estimates Are Important to the Legislature’s Coequal Status

Estimated revenues are another frequent source of difference between our office and DOF. Some have asked why this is the case and whether aligning LAO and DOF estimates would be helpful to the Legislature. Although aligning revenue estimates might reduce the potential for confusion, doing so would risk creating bigger problems. In particular, it could provide a false sense of certainty about the state’s fiscal position. This, in turn, could prevent the Legislature from grappling with the important risks and trade-offs inherent in their budgeting decisions. Our independent revenue estimates facilitate consideration of these trade-offs in several ways.

First, given the importance of revenues to the state’s overall spending capacity, our nonpartisan independent revenue estimates provide the Legislature with an alternative, credible basis for budget decisions that may diverge from the Governor’s proposal. Our process also aims to promote the Legislature’s consideration of its own risk tolerance. To this end, in recent years, we have shifted away from emphasizing point forecasts in favor of providing a plausible revenue range. Our approach does not preclude the Legislature from using our forecast to adopt a specific revenue estimate, however. For instance, the Legislature could adopt our main (median) revenue forecast from the range. Our main forecast presents estimates that we think are “most likely to be least wrong.” That is, we estimate that the main forecast is equally as likely to be above or below actual revenue outcomes. Reflecting the ever-changing economic backdrop, the high-and-low points in the range, as well as the upside and downside risks to the main forecast, will vary from year to year.

Second, even if the Legislature most often adopts the administration’s revenue estimates in the budget, the alternative LAO numbers facilitate valuable deliberations. The administration’s revenue estimates flow from the specific economic scenario that it deems most likely to unfold. But since macroeconomic dynamics are multifaceted and context dependent, successfully predicting the scenario that will play out is virtually impossible. Consider as evidence that in just the last several years—during and after the COVID-19 pandemic—consensus macroeconomic forecasts have been wildly off from actual outcomes. But adopting a budget requires a specific revenue estimate, so what to do? Here, the LAO and DOF approaches can complement one another. For example, the Legislature can compare DOF revenue estimates to our main forecast to determine if it is comfortable with the risks associated with them. If the DOF revenue estimate is above our main forecast, this would suggest we estimate that it carries greater downside risk, and vice versa. Given the uncertainty of these forecasts, deliberation over the budget assumption is healthy and appropriate. Our approach reflects that, in part, we believe humility is always an important virtue in fiscal and revenue forecasting.

Finally—and briefly—while numerous states employ various consensus revenue estimating methods, the research is ambiguous as to whether they yield more accurate results. There is even evidence to suggest that drawing upon forecasts from multiple sources can improve accuracy, assuming the forecasts themselves are developed independently.

These trade-offs speak to the Legislature’s status as a coequal branch of government. A nonpartisan and independent assessment of the state’s fiscal trajectory, developed on its behalf, ensures the Legislature has a credible basis for making its own budget decisions. The added complexity from the alternative revenue estimates making this possible is a worthwhile price to pay.

Reaffirming the LAO’s Independent Mandate

The LAO was established in 1941 because the Legislature sought an independent source of information and analysis—one directly accountable to it and serving as a fiscal watchdog on its behalf. Although such an office was unprecedented at the time, the LAO’s existence inspired the creation of similar offices in state governments across the country and, eventually, the Congressional Budget Office in 1974. The office’s independence remains as crucial as ever for fostering informed debate, ensuring transparency, and upholding the integrity of the state’s budget process. While differences between LAO and DOF estimates may sometimes add inconvenient complexity, they embody vital safeguards that ensure diverse perspectives are rigorously considered in shaping California’s financial future. Our purpose is not to align with the executive branch but to provide the Legislature with the independent, critical analysis it needs to make informed decisions that best serve the public interest.