On Wednesday, November 16, 2022, the Legislative Analyst Office (LAO) released their 2023-24 Budget Fiscal Outlook, revealing a budget deficit in the coming year and an estimated statutory cost-of-living adjustment (COLA) of 8.73 percent. When the report was released, it revealed an estimated $25 billion deficit and as of today, the LAO updated their report to reflect a $24 billion budget deficit. Below are some of the highlights from the report.

The Economic Picture
Inflation has been surging which have been due to supply chain challenges and a tight labor market. In response, the federal reserve has been raising interest rates significantly, which increases the risk of an economic downturn. The last couple of months, we have seen the state income tax withholding down compared to last year. The LAO’s revenue estimates are down $42.4 billion, and the state is not only facing a $24 billion deficit in the 2023-24 fiscal year, but that deficits will continue through 2026-27.

Proposition 98 Guarantee
The LAO shared that the Proposition 98 Guarantee is below the previously enacted budget level going from $110.4 billion down an estimated $108.2 billion, a $2.2 billion decrease. There are also three key adjustments to make additional funding available in 2023-24 which include:

  • $5.7 billion in ongoing Proposition 98 funds to one-time activities (including programs and reserve deposits) that was allocated in the 2022-23 budget and set to expire in 2023-24.
  • Through the three-year rolling average calculation, there was a gradual ramp down, generating $2.7 billion in savings in 2023-24.
  • There is a $2.4 billion Proposition 98 reserve withdrawal required due to weakness in the guarantee.

Cost-of-Living Adjustment
The estimated COLA in 2023-24 is 8.73 percent and the state could cover up to 8.38 percent of that. Each percentage point change equates to $910 million. Estimate for future COLA includes 5.3 percent in 2024-25, 4.5 percent in 2025-26 and 4.2 percent in 2026-27.

Proposition 28: Arts and Music in Schools
California voters decided to pass Proposition 28 in this November general election. The proposition creates a new ongoing program to fund arts education. The LAO estimates the initial amount in 2023-24 to be $941 million, allocating 70 percent of funding based on total prior-year enrollment and 30 percent based on share of low-income students. School districts will be required to spend 80 percent of the new funding on hiring staff, and publish annual reports on how they spend the money.

School Outlook Through 2026-27

*Dollars in billions

Key Takeaways
The LAO recognizes that there is not much room for new ongoing commitments and advises the legislature to think about building a resilient budget, while encouraging a revisit of the $4 billion investment in the Expanded Learning Opportunities Program (ELOP).