Budget Deficit Looms & Preparing for 2024

On Thursday, December 7, the Legislative Analyst’s Office (LAO) released a report titled The 2024-25 Budget: California’s Fiscal Outlook. The report anticipates the size of the state’s budget deficit at a staggering $68 billion for FY 2024-25. This report provides the first official estimate of the size of the budget problem to be solved in the coming months.

Why is the Deficit So Large?

The Federal Government delayed its 2022 tax filing deadline from April 15 to November 16, 2023, meaning that the Legislature and Administration did not receive a full picture of the 2022-23 tax collections until the state was well into the next fiscal year. The state adopted the 2023-24 budget without understanding the economic weakness that emerged in 2022, when the LAO says the state’s economy entered a downturn. Income tax collections were down 25% in 2022-23, and total revenues fell by 20%. The LAO expects revenues to remain flat in 2023-24, with growth likely returning in 2024-25 and beyond. Despite this growth, LAO estimates the budget will face ongoing operating deficits of approximately $30 billion from 2025-26 through 2027-28.

Of the $68 billion deficit, $26 billion is attributed to lower revenues in FY 2022-23. The 2023-24 budget assumed a deficit of $14 billion in FY 2024-25. The LAO explains that, had the Legislature and Governor known about the large decline in revenues on the typical schedule at the May Revision, many of the solutions would have been adopted in the FY 2023-24 budget. Thus, the 2024-25 budget must address shortfalls generated over multiple prior years.

Proposition 98 Funding

The large decline in state revenues will reduce the minimum required K-14 spending under Proposition 98 by $21 billion for the period 2022-23 through 2024-25. However, the automatic spending reduction for schools is only $4.3 billion, leaving school spending at nearly $16.7 billion above the constitutional Minimum Guarantee funding levels. The LAO identifies this as a primary potential budget solution – reduce K-14 Proposition 98 spending to the constitutional minimum. An additional option would be to utilize up to $7.7 billion in the Proposition 98 reserve account to backfill school spending that exceeded the Minimum Guarantee in 2022-23, so that schools don’t experience reductions to prior years. If Proposition 98 was funded at the Minimum Guarantee in 2022-23 and 2023-24, the 2024-25 Minimum Guarantee would be $108.2 billion ($3.5 billion less than the June 2023 estimate). This amount would cover the cost of existing K-14 programs funded in 2023-24, but it would not cover costs associated with an anticipated 1.27% COLA, which brings costs to $109.3 billion.

Other Solutions

LAO outlines a number of other potential budget solutions, including:

• Reduce one-time spending, for a total of approximately $10 billion in solutions, including $1.8 billion in various education programs.
• Withdraw reserves – up to $24 billion ($23 billion in the Budget Stabilization Account, and $1 billion in the Safety Net Reserve for health and human services programs). LAO cautions not to draw down the full reserve amount, to preserve the option to use reserves in future years.
• Revenue increases – either targeted solutions or broad-based tax increases.
• Spending reductions to core services.

How Does this Affect Community College Facilities?

There are a number of issues that we will monitor closely in this budget conversation:

• Student Housing – The Administration is still developing the state financing solution for the SB 169 Higher Education Student Housing Grant Program, and we anticipate more information on the proposed solution in conjunction with the Governor’s January 10 budget proposal. While the solution may rely on lease revenue bonds or a similar financing mechanism, and not a large General Fund commitment, we will remain vigilant on this issue.
• Student Housing – Revolving Loan Fund – The 2023-24 budget provided community colleges with $50 million for the new zero-interest Revolving Loan Fund that is being developed by the California School Finance Authority. The 2023-24 budget also included a promise to provide $300 million annually for this program through 2028-29, with 25% of those funds dedicated to community colleges. This program was funded by the General Fund and could be on the table for possible reductions.
• Scheduled Maintenance – The 2023-24 budget reduced the 2022-23 scheduled maintenance funding from $840.7 million to $346.4 million. This program is funded by Proposition 98 operational dollars.
• State school bond – During difficult budget years, policymakers often look to financing solutions to meet critical state needs. We remain hopeful that the Legislature and Governor proceed will proceed with a November 2024 state school bond, which does not create significant new General Fund cost pressures.

Next Steps

The Governor will release his 2024-25 budget proposal on January 10, kicking off the season of in-depth review by the Legislature. We do not know what deficit number the Governor and Legislature will ultimately recognize. Expect difficult budget conversations in Sacramento over the coming months, as policymakers work toward a June 15 constitutional deadline to pass the budget.

Rebekah Kalleen
CCFC Executive Director