LAO predicts multi-year deficits for California

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California could face budget deficits until at least 2023-24, with multi-year deficits totaling between $64 billion in a U-shaped recession or $126 billion if the country experiences an L-shaped recession, according to a report released Friday by the state Legislative Analyst’s Office.

“There is an unusually high level of uncertainty at this point,” Legislative Analyst Gabriel Petek said during a media call. “It’s across multiple dimensions, more than a typical recession.”

The report comes a day after the state’s Department of Finance released a report that estimated a deficit of $54.3 billion.

The LAO forecast predicted an $18 billion deficit in fiscal year 2020-21 in a U-shaped scenario or a $31 billion deficit for the upcoming fiscal year in an L-shaped scenario.

The LAO’s economic forecasts and those of the Department of Finance don’t always perfectly align, as they are dependent on what baseline scenarios were factored in, Petek said.

LAO Gabriel Petek
LAO Gabriel Petek predicted multi-year deficits in a Friday forecast.

The LAO forecast predicted the state’s newly emergent fiscal challenges are likely to extend well beyond the end of the public health crisis, but was light on advice to the Legislature in terms of potential solutions. “This is not to be viewed as an alternative budget proposal,” Petek said.

“It is akin to the fiscal outlook we released in November,” Petek said. “We will unpack the governor’s May budget revision as usual.”

He noted the LAO usually does a fiscal outlook in November ahead of the release of the governor’s draft budget in January, and then a second report after the May revise.

With the current uncertainties in mind, Petek said, they wanted to “give the Legislature a better idea of what they could be up against.”

The LAO is advising the Legislature not to wait until the suggested “August revision” made by the State Assembly, and instead to make any cuts needed to balance the budget sooner rather than later, Petek said.

“We encourage the legislature to begin to tackle the problem in June,” Petek said. “Waiting until August will compound the problem. Some changes take time to take effect, it’s better to tackle them upfront. It is also easier to make cuts on a mid-year basis from a programic standpoint.”

The governor released a $222.2 billion draft budget in January, but California’s fiscal picture — along with that of the rest of the country — has gone from very bright, to dismal.

Pre-pandemic, the governor's fiscal 2021 budget reflected a $5.6 billion surplus, while the LAO forecast in November projected a $7 billion surplus.

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