LAO warns that Newsom’s revenue projections may be too optimistic

The Legislative Analyst’s Office doubled down last week on their earlier prediction that California would generate less revenue than Gov. Gavin Newsom is projecting for the 2023-24 state budget.

There is a “good chance” that revenues would be lower for the rest of the 2022-23 and next year, the LAO said in its budget overview. As a result, the Legislature should “plan for a larger budget problem” and deal with it by cutting more one-time and temporary spending than Newsom proposes, it said.

In November, the LAO projected a General Fund revenue shortfall of $25 billion in 2023-24; using updated revenue estimates, Newsom last week projected a $22 billion deficit for the General Fund. Both estimates could be off by the end of the year, but with a risk of a recession lurking, the Legislature should proceed cautiously, the LAO indicated.

Newsom also forecast that funding would be $1.5 billion less in 2023-24 than is currently funded for Proposition 98, the formula that allocates 39% of the General Fund for TK-12 and community colleges. However, a declining enrollment statewide and expiring  one-time spending will free up enough to cover an 8.13% cost of living increase and build in $900 million in new spending. This would include another $250 million for literacy coaches in in the highest poverty schools, plus $300 million to address the needs of the lowest performing students in many of those schools.

To make the budget balance, Newsom would take back $1.2 billion, about a third, of the arts and instructional materials discretionary block grant that was passed in the 2022-23 budget and to withhold $500 million for transitional kindergarten facilities, which could slow universal TK’s implementation.

The LAO recommends that the Legislature consider the possibility of  rescinding more one-time education spending approved last year, in the event further cuts are needed when the 2023-24 state budget is revised in May.