California heading into new year with balanced budget, say state analysts

You might hear a lot about “austerity” from the California legislature next year. 

State analysts project a balanced budget in 2025, but also say deficits are likely in the years after. That could mean less funding to grow social programs. 

California’s Legislative Analyst’s Office released its yearly report on Wednesday mapping out where the state finances will likely be next year as the governor and legislature work on a new budget. 

State Legislative Analyst Gabriel Petek said the LAO projects California will have a $2 billion deficit, which is small considering the size of the state and its economy. 

“We describe it as being roughly balanced, approximately balanced in that period,” he said. 

Petek said the legislature made big compromises last year and withdrew $7 billion from the state’s rainy day fund, which helped keep the budget mostly balanced. But he also said the state isn’t in a position to add to its social programs without making other cuts. 

He added very few industries in the state are adding jobs and that’s a major problem.

“All of the new job creation has really been attributable to government and healthcare related jobs,” he said. 

Additionally, the state’s social programs are growing, which means they need more funding. That includes a Medi-Cal expansion that allowed for a bigger share of older adults eligible for benefits. 

Californians also voted to approve two pricey ballot measures earlier this month– Propositions 35, extending a tax on managed health care plans and Proposition 36, adding penalties for certain drug and theft-related crimes. Combined, those added about $3 billion in costs to the budget. 

The state’s finances also rely heavily on tax revenue from a small number of tech companies and its highest-earning workers, who have increased their pay more than most other workers, largely because of bonuses and stock compensation.

Petek said that’s concerning. 

“That to us feels a little more precarious than if it were built on, you know, more robust job growth, more broadly based job growth in the state, consumer spending,” he said. 

Almost 10% of the state’s income tax withholding in the first half of this year came just from stock pay from four companies – Nvidia, Apple, Meta, and Alphabet, which owns Google. 

The stock market factors largely into that revenue. Petek said that makes it toughto plan a budget around.

“When it's based on the markets, sentiment can change quickly,” he said. 

He said that because enthusiasm for artificial intelligence has helped boost those companies, it could become a financial problem for the state if that enthusiasm wanes. 

President-elect Donald Trump has threatened to cut federal funding to states, in some cases specifically to California, when he takes office again in January. When asked if those threats were factored into the report, Petek said the LAO can’t do that without specific proposals. 

“The way our office works is based on facts, data, evidence that we have on hand,” he said. “We know that there is potential for California to be in the bullseye, but it’s not something we built into this forecast.”

In a statement, Speaker of the Assembly Democrat Robert Rivas responded to the report saying, “It’s not a moment for expanding programs, but for protecting and preserving services that truly benefit all Californians.”

Assembly Republican Leader James Gallagher from Yuba City also responded to the report, saying, “Democrats got us into this mess, and I have no confidence in their ability to fix things without inflicting real pain on Californians.”