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California's budget forecasted to be relatively balanced, but no room for extra spending

Legislative analysts predict an upcoming $2 billion deficit with larger deficits in upcoming years.
Credit: Jackson Ellison

SACRAMENTO, Calif. — There's good and bad news when it comes to the state's budget for this upcoming fiscal year. 

The good news is the state's nonpartisan legislative analysts say the budget looks to be in fair condition. The bad news is they say it won't stay that way and the state is encouraged to cut back.

The Legislative Analyst's Office (LAO) forecasted the state's budget for the 2025-2026 fiscal year on Wednesday.

"We describe the state's budget condition as being in fair shape, and we would describe it as being roughly balanced," said Gabe Petek, Legislative Analyst with the LAO.

The LAO predicts a relatively small deficit of $2 billion compared to last year's prediction of $68 billion. Governor Gavin Newsom disagreed to last year's numbers and estimated it to be $47 billion. The LAO credits the state legislature for closing the gap this year, but believes the next few years aren't as promising.

"The subsequent three fiscal years after the budget year, we estimate there to be pretty significant operating deficits emerging in the range of $20-30 billion per year," said Patek.

The LAO says the state is facing a weaker economy with unemployment increasing an additional 25% compared to strong labor markets in 2019 and 2022. However, the state does have $7 billion in revenue.

"It's really been driven by income gains among high-income taxpayers, which are benefiting a lot from the very strong stock market trends that we've been seeing," said Patek.

The state's Department of Finance tells ABC10 it believes the report is reasonable.

"We believe that we are in a much better position starting this coming budget year than we were 12 months ago," said H.D. Palmer with the Dept. of Finance.

Still, the state believes it does need to cut back on spending.

"One thing we're not going to do is, and from the governor's standpoint, is we're not gonna commit the state to higher levels of ongoing spending that can't be sustained by revenues," said Palmer.

Senator Roger Niello (R-Fair Oaks) says the state should analyze its spending for certain programs.

"We need a robust analysis of existing programs and whether or not they're doing what we expected them to do when they were established. And if they're not, we need to eliminate those programs and therefore cut expenses," said Niello.

The LAO says the state did not add any new jobs this year, but still worked to fill vacant positions.

Senate President pro Tempore Mike McGuire (D-North Coast) provided ABC10 with this statement:

“Through last year’s action, we’ve helped stabilize this year’s budget. And it goes without saying, there’s a lot more work to come. We need to continue to buckle down on spending and be incredibly strategic on any future fiscal expansion. Folks are doing their best to make ends meet, and it’s our responsibility to implement policies and secure investments that will make their lives more affordable. I’m grateful to Senate Budget Chair Scott Wiener, our Budget Sub-Chairs, and the members of the Senate Budget Committee for their continued work and focus, especially in a year where all eyes will be on California.”

Assembly Republican Leader James Gallagher (R-Yuba City) provided ABC10 with this statement:

“California is the highest-tax state in the country, yet we are still facing multi-billion-dollar deficits well into the future. Democrats got us into this mess and I have no confidence in their ability to fix things without inflicting real pain on Californians.”

Speaker of the Assembly Robert Rivas issued this statement:

“We need to show restraint with this year’s budget, because California must be prepared for any challenges, including ones from Washington. It’s not a moment for expanding programs, but for protecting and preserving services that truly benefit all Californians.”

Assembly Budget Chairman Jesse Gabriel (D-Encino) issued this statement:

“The latest fiscal outlook underscores the need for a cautious, thoughtful, and prudent approach to our state budget. At the same time, we must be prepared for uncertainty and challenges with a new federal Administration. The Assembly Budget Committee looks forward to crafting a budget that protects core programs, prioritizes accountability, safeguards California values, and focuses on the most important issues facing working families.”

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