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California Budget Deficit Balloons to $68 Billion

California State Capitol in Sacramento

California’s budget deficit has skyrocketed to a record $68 billion following lower tax revenue than projected. 

The deficit will likely cause the state to dive into reserve funds and cut spending at a level not seen since the Great Recession. 

Why is there a Budget Deficit? 

Following years of a record-high budget surplus, California’s good fortune finally came crashing down in 2023. 

In the 2023-2024 fiscal year, the state had a nearly $32 billion budget deficit. With California's progressive tax system, much of the state’s revenue is driven by the personal income of wealthier residents. 

Since those individuals' income is oftentimes closely related to the stock market, California’s tax revenue took a hit when the market didn’t perform as well. 

So, with nearly double the deficit in the upcoming fiscal year than in 2023, what is behind the state’s lack of revenue? 

In June, California’s Legislative Analyst’s Office predicted that the state would have a $14.3 billion budget deficit in the 2024-2025 fiscal year. However, with the tax filing deadline being delayed from April to November, it was difficult to project accurately. 

Thus, with real tax data, the nonpartisan office now predicts a nearly $70 billion budget deficit. 

The reason for the budget crisis is similar to last year, a lack of tax revenue. Tax collections were $26 billion lower than expected and combined with the state’s economic growth being slower than many other big states, California’s budget deficit has reached a record high. 

Next Steps

To prepare for the largest deficit in state history, Governor Newsom’s administration has called for a spending freeze in all state agencies. 

The spending freeze will include all non-vital financial purchases from state entities such as: 

  • Avoiding new contracts 
  • Canceling non-essential travel 
  • Avoid purchasing non-essential technology or transportation equipment 
  • Reevaluate expensive IT projects

While some in the legislature would prefer to dip into rainy-day funds rather than make massive spending cuts, it’s evident that the state will likely have to do both. 

Although the state has nearly $30 billion in reserves, California is expected to have a multi-year deficit. Thus, relying on just reserves without cutting spending could leave the state with a massive financial problem. 

As a result, the state will likely have to cut new and previous spending from the 2024-2025 fiscal year budget. 

Regardless, California elected officials will have their work cut out for them as they prepare for their January budget proposal. 

We’ll make sure to keep you updated on the latest news about the state’s budget crisis. Until then, keep up with BOMA on the Frontline for the latest news in the Greater Los Angeles area. 

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