In 2023, California had to curtail its expenditures asit found itself facing a substantial $32 billion budget deficit for the fiscal year 2023-24. Nevertheless, the finalized spending plan for the general fund reached a historical high, totaling $308 billion, marking the second-largest on record. Notably, just a few years prior in 2019, the budget stood at less than $200 billion.
Surprisingly, the state managed this financial balancing act without depleting its reserves, which had reached a record level of $37.8 billion. This substantial reserve was seen as a safeguard in case state tax revenues fell short of projections during the fiscal year, preventing the need for severe cutbacks in essential programs, as had been the case in previous efforts to address significant deficits.
The fiscal intricacy arose from an unusual aspect related to tax deadlines. Due to natural disasters that impacted the state, the Internal Revenue Service extended the filing deadline for Californians from April to October and then further to November. Consequently, the state’s usual tax revenue collection was delayed.
The consequences of this delayed accounting became evident in early December, revealing a projected budget deficit of $68 billion for 2024-25, with $26 billion attributed to the emerging deficit for 2022-23. Lawmakers, unaware of the looming budget hole for 2022-23 when passing the 2023-24 budget in June, are now faced with the challenge of addressing the fiscal gap from the previous year while grappling with a new collapse in revenues relative to spending plans in the current fiscal year.
The Legislative Analyst’s Office suggested potential measures such as cuts to one-time spending, tapping into reserves, and delaying other programs to finalize the 2024-25 state budget in June. The fate of ongoing programs remains uncertain and may also be subject to potential cuts.
The already concerning fiscal outlook was exacerbated by predictions of stagnant revenue growth and annual deficits ranging from $14 billion to $20 billion. Costs were expected to rise due to generous contracts negotiated with state worker unions, and the specter of a recession loomed as a potential worsening factor.
In response to the precarious budget situation, Governor Newsom vetoed 156 bills with significant price tags, urging lawmakers to propose funding plans through the annual budget process. Despite efforts to maintain fiscal discipline, critics questioned the state government’s narrative, highlighting that the final budget deal only reduced actual spending by $8 billion, with the remaining savings achieved through borrowing and fiscal maneuvers.
The budget plan also incorporated a contingency plan, allowing the governor to postpone spending on certain one-time programs by March of the following year if revenues fall short.
Looking ahead to 2024, the state faces critical challenges, including the potential delay or reduction of billions of dollars in planned spending as the deficit worsens. Lawmakers are under pressure to identify alternative funding sources, whether through taxes, spending cuts, or accessing the state’s significant reserves. The clash between progressive policy goals and fiscal realities sets the stage for a contentious debate over prioritizing and funding key programs.
