Legislative Analyst: State to face $58 billion, three-year budget deficit

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In the first glimpse at a dark financial forecast, the Legislative Analyst’s Office reported Friday that the next California state budget will likely face a three-year $58 billion deficit, on the magnitude of the impact of Great Recession in 2008.

What that will mean for schools and community colleges will become clearer later this week, when the LAO releases a full analysis of revenues and possible actions Gov. Gavin Newsom could take. As a rule of thumb, TK-12 and community colleges receive about 40% of the general fund through Proposition 98, the formula that determines their allocation. Their portion of the budget gap would be roughly $23 billion, more than double the amount that schools and community colleges have stashed away for fiscal emergencies in the state rainy day fund.

Newsom will release his proposed 2023-24 budget in early January.

The LAO and Newsom’s advisers had been warning for a year that an economic downturn, if not a full-blown recession, was likely, with budget repercussions. What they didn’t realize was that it was already happening. Because of the impact of storms that devastated parts of California and the nation last winter, the deadline for paying 2022 federal taxes was delayed from April 15 to Nov. 16. That meant legislators had an incomplete picture of 2023-24 revenues when they passed the budget in June.

The LAO reported that the 2022-23 budget ended $26 billion in the red, and that shortfall will carry over to 2023-24 and 2024-25 for a total of $58 billion. The LAO reported total income tax returns fell by 25% in 2022-23, and, due to the Federal Reserve’s increases in interest rates to temper inflation, home sales declined by half, and the state’s unemployment rates rose from 3.8% to 4.8% in 2022.

The LAO also predicted that the cost of living adjustment, derived from a federal formula, will increase next year for the Local Control Funding Formula, special education and other ongoing programs by only 1.27%, which is only about $1.3 billion in new money. That compares with 8.22% in the current budget.

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