Governor’s Budget Roughly Balanced on Higher Revenues. The administration projects the budget faces a roughly $3 billion deficit. This is lower than our November Fiscal Outlook estimate of an $18 billion deficit, for two offsetting reasons. First, and most importantly, the administration’s revenue estimate is considerably higher than ours because it does not incorporate the strong risk of a stock market downturn. Second, however, these higher revenues are offset by higher spending under the administration’s assumptions and estimates.  Stock Market Poses Serious Risk to Revenues. Several historically reliable signs suggest the stock market is overheated and at high risk of reversing course into a downturn in the next year or so. Should a stock market downturn occur, income tax revenues would fall considerably. These risks are severe enough that not incorporating them into this year’s budget, as the Governor proposes, would put the state on precarious footing. Further amplifying this precariousness, even under the administration’s more optimistic revenues, the budget is only roughly balanced in the near term.  Multiyear Budget Deficits Alarming. Both our office and the administration expect the state to face multiyear deficits, with estimates ranging from $20 billion to $35 billion annually. These deficits are concerning for three reasons. First, after four years of projected deficits and a cumulative total of $125 billion in budget problems solved so far, the state’s negative fiscal situation is now chronic. Second, structural deficits have grown—our November outlook is the most negative forecast of the budget’s position since the pandemic. Finally, deficits have persisted even as the state’s economy and revenues have grown, underscoring that the problem is structural rather than cyclical. Taken together, these trends raise serious concerns about the state’s fiscal sustainability.  Administration Acknowledges These Challenges, but Governor’s Budget Does Not Materially Address Them. In the budget summary and presentation, the Governor and administration officials have acknowledged the downside risk to the state’s revenue picture and the multiyear challenges facing the budget. However, the Governor’s budget does not include material actions to address either challenge. In this report, we offer an alternative approach for the Legislature to take that would put the state on better fiscal footing. Ultimately, this approach includes: adopting LAO revenue estimates, tackling the resulting budget problem, and shrinking multiyear deficits. 

Visit Sunset Elimination for Brown Act Meeting Procedures - California Special Districts Association for more information and to submit a letter of support.