LAO Publishes 2021-22 Budget Fiscal Outlook

This week, the California Legislative Analyst’s Office (LAO) published its annual report providing an independent assessment of the California state budget condition for the upcoming fiscal year and over the longer term. The LAO’s latest report finds the state’s budget situation has improved considerably relative to the 2020-21 Budget Act, with an estimated $26 billion windfall in 2021-22. However, the state also faces an operating deficit beginning in 2021-22 and throughout the outlook period, growing to $17 billion by 2024-25.

The LAO notes the state’s economy has experienced a quicker rebound than expected amid the ongoing COVID-19 pandemic, but the recovery has been uneven with many low-income residents out of work and most high-income residents spared. Tax collections and expenditures are consistent with the state’s economic picture, and data on new applications for safety net programs, including Medi-Cal and CalFresh, in the first few months of 2020-21 indicate applications have been below 2019-20 levels.

The projected $26 billion windfall results from revisions in prior- and current-year budget estimates and is entirely a one-time surplus. The LAO’s analysis suggests revenues could easily end up $10 billion or more above or below the main 2021-22 forecast due to the unprecedented amount of uncertainty associated with the state’s fiscal picture. Despite this one-time windfall, the LAO projects the state will face an operating deficit which is relatively small in 2021-22 and gradually grows moving forward.

The LAO outlines a series of recommendations to the Legislature as they begin budget considerations in the new year. Notably, the LAO recommends using approximately half of the projected windfall ($13 billion) to restore the budget’s fiscal resilience by making an optional deposit into a state reserve, such as the Safety Net Reserve, to help maintain services when demands on safety net programs increase. The other half of the windfall, according to the LAO, is recommended to be dedicated to one-time purposes, focusing on activities that mitigate the adverse economic and health consequences of the ongoing COVID-19 pandemic. The LAO notes the budget cannot afford any new ongoing augmentations and recommends the Legislature use the upcoming budget process to begin to address the state’s ongoing deficit through spending reductions or revenue increases.

The full LAO Fiscal Outlook report is available here.