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December 1, 2023
LAO Fiscal Outlook Expected Next Week; Tax Receipts Down $26 Billion
In our last ACCCA Update, we informed you that the Legislative Analyst’s Office (LAO), the Legislature’s nonpartisan policy and fiscal advisor, was delaying the release of its Fiscal Outlook report due to the extension of final payments for tax year 2022 to November 16. The report, which provides an updated analysis of the state’s economic and budget conditions, is largely viewed by Capitol insiders as the unofficial kickoff to the budget season.
We have heard rumors that the LAO plans on releasing its Fiscal Outlook report next week, which we will be sure to detail in next week’s update.
As a precursor to its report, the LAO reported this week that 2022 tax receipts came in $26 billion lower than 2023 Budget Act estimates. This steep drop in state revenues equates to a significant downward adjustment to the 2022-23 Proposition 98 minimum guarantee of approximately $10.4 billion. This means that lawmakers will have to decide whether to leave the prior-year minimum guarantee at the June 2023 level of $107.4 billion (essentially over-appropriating the minimum guarantee) or take action to align the state’s spending obligation to K-12 schools and community colleges with the lower state revenues (or approximately $97 billion).
While we will have to wait until Governor Gavin Newsom’s January State Budget proposal to see how his Administration plans on addressing the revenue shortfall, there are likely to be discussions in the Capitol around tapping into the Proposition 98 reserve to prevent cuts to core education funding. At the 2023-24 Budget Act, the balance of the education rainy day fund was $10.8 billion. The authority of the Legislature to make automatic withdrawals from the fund is formulaic and requires the Proposition 98 minimum guarantee to be lower in one fiscal year than it was in the prior fiscal year. When this occurs, the Legislature can only withdraw funds from the Proposition 98 reserve account in an amount sufficient to bring funding up to the prior-year level. Alternatively, if the Governor declares a State Budget emergency, the Legislature has the discretion to make withdrawals from the rainy day fund in any amount.
One thing is for sure: we will all be waiting on pins and needles to see what the Governor has to say about this shortfall when he releases this 2024-25 State Budget proposal next month.