The LAO is the California Legislature’s nonpartisan fiscal and
policy advisor. The LAO’s annual Fiscal Outlook publication
provides an independent assessment of the California state budget
condition for the upcoming fiscal year. The publication also
includes a forecast of the state’s longer-term condition,
typically a three-year period following the upcoming fiscal year.
The 2025-26 Fiscal Outlook includes the LAO’s assumptions about
the state’s economy for fiscal years 2025-26 through 2028-29 and
how the state’s economy affects the state’s annual revenues and
expenditures.
At this time, the LAO describes 2025-26 as “roughly balanced” and
forecasts a state budget deficit of about $2 billion. The
forecasted deficit is smaller than originally anticipated, which
the LAO attributes to the actions of the Legislature and the
Administration
in spring 2024 to reduce expenditures in 2024-25 and 2025-26.
The relatively small deficit is also the result of improved
income tax revenues offset by forecasted increases in
expenditures, despite the proactive budget-balancing actions made
in spring 2024. Specifically, the LAO expects revenue projections
to exceed June 2024 estimates by about $7 billion and estimates
higher spending of about $8 billion. The increased expenditures
are the estimated cost of recently chaptered legislation and
propositions approved by the electorate in November. For the
three-year period following the upcoming fiscal year, the state’s
fiscal condition is expected to be considerably more challenging.
The LAO forecasts an annual operating deficit between $20 billion
to $30 billion for 2026-27, 2027-28, and 2028-29.
As state and federal funds account for nearly half of county
revenue on average, fiscal forecasts and analysis of the state’s
economic condition can help counties prepare balanced and
sustainable budgets. However, the LAO does not include any
predictions regarding anticipated changes in federal policy that
may affect California’s fiscal condition.
Looking ahead, Governor Newsom will announce his Administration’s
proposed state budget for 2025-26 and the state’s updated revenue
forecast by January 10, 2025. CSAC will continue to monitor the
state’s economic condition and keep counties informed of economic
assessments that may aid in preserving fiscal sustainability in
the years ahead.
