Report: California likely to have $25B budget deficit

SACRAMENTO (AP) — California will likely have a $25 billion budget deficit,next year, state officials announced, Wednesday, ending a run of historic surpluses and acting as a warning to other states about a potential recession.

Democratic-controlled California taxes rich people more than other states, meaning most of its drop in revenue is because the uberwealthy aren’t making as much money as they used to. That’s why California is often one of the first states to have budget problems when the economy starts to falter.

The S&P 500, a key indicator of the health of the stock market that drives the income of the superrich, has fallen more than 17% since its peak, in January. State revenues are now $41 billion below expectations, according to an outlook published, Wednesday, by the nonpartisan Legislative Analyst’s Office. The estimated deficit is lower because some of those revenue losses were offset by lower spending in other parts of the budget.

The shortfall won’t endanger some of California’s major expansions of government services, including free kindergarten for 4-yearolds and free health care for low-income immigrants living in the country without legal permission.

But it will force some painful spending decisions, including possibly delaying an ambitious program to clean up homeless encampments across the state.

Despite the gloomy outlook, California is in a better position to weather an economic downturn than it has been in the past. The state has $37.2 billion stored in its various savings accounts. And it has plenty of cash available to meet its obligations, this year.

“It’s not insignificant, but it’s also manageable,” Legislative Analyst Gabriel Petek said of the deficit. “We don’t think of this as a budget crisis.”

California’s revenues are famous for their volatility, peaking and plummeting quickly at the whims of the stock market. Just two years ago, state officials predicted a $54 billion deficit because of the pandemic — a shortfall that never happened because the economy remained strong.