California Faces Continued Budget Gap

​​The California Legislative Analyst’s Office (LAO) released its Fiscal Outlook report and now estimates a $18 billion budget gap this coming fiscal year. The report advises the Legislature to address the budget problem through a combination of ongoing solutions—namely, achievable spending reductions and/or revenue increases. 

The report notes that it’s not safe to bet artificial intelligence fueled exuberance is sustainable. The forecast incorporates the strong risk that recent income tax gains are tied to an unsustainable stock market. It includes projected income tax collections that are somewhat weaker than suggested by cash trends, but still tens of billions of dollars above where they would be if stocks actually drop significantly. This middle ground approach offers the state some insurance against revenue declines, resulting in smaller budget corrections should a market downturn actually occur.

2026 27 Budget Problem Now Larger Than Anticipated. Under the LAO estimates, the almost $18 billion budget problem in 2026 27 is about $5 billion larger than the budget problem anticipated by the administration in June, despite improvements in revenue. This is because constitutional spending requirements under Proposition 98 (1988) and Proposition 2 (2014) almost entirely offset revenue gains. Moreover, we estimate costs in other programs to be about $6 billion higher than anticipated. Starting in 2027 28, the LAO estimates structural deficits to grow to about $35 billion annually due to spending growth continuing to outstrip revenue growth.
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If the LAO estimates hold, the Legislature will face a fourth consecutive year of budget problems—all during a period of overall revenue growth. As it stands—with larger forecasted deficits and many fewer tools available to address them—California’s budget is undeniably less prepared for downturns.