California’s fiscal 2025 budget addressed the revenue gap that was left unresolved in fiscal 2024. However, according to a Fitch Ratings commentary, additional actions will be necessary to achieve fiscal balance in the upcoming years. The state’s AA/Stable issuer default rating is supported by this budget, despite potential further adjustments needed to align spending with the lower revenue trajectory.
California’s financial rollercoaster during and post-pandemic times complicated budget planning. The state experienced a drastic drop in revenue for fiscal years 2023 and 2024, falling $62 billion short of forecasts. Crafting the fiscal 2024 budget was particularly challenging after the IRS and the state delayed income tax filing deadlines, leading to delayed revenue reports months after the budget was signed.
Despite revenue falling short of forecasts in fiscal 2024, California is expecting a 6.5% year-over-year increase in revenue, reaching an estimated $190.3 billion. Revenues are anticipated to grow even further in fiscal 2025, with the state expecting to collect $207.2 billion. These numbers represent a significant increase from pre-pandemic levels, showing a rapid compound annual growth rate over five years.
To return to structural balance, California is implementing a variety of measures. The fiscal 2025 budget includes expenditure cuts, revenue increases, drawing on reserves, and one-time measures. The budget defers general fund spending, delays payments to state university systems, cuts funding for state agencies, and shifts spending from the general fund to other funds. These actions aim to reduce ongoing spending by $16 billion.
In order to close the fiscal 2024 gap and pass a balanced fiscal 2025 budget, California tapped into reserves. Lawmakers depleted the Proposition 98 public school reserve account and used $51 billion from the rainy day fund. Further drawing down of reserves is proposed for fiscal 2025 to 10.7% of revenues. Despite tapping into reserves, California aims to maintain $22.2 billion in total reserves by the end of the 2024-25 fiscal year, preserving budget resilience.
California’s journey towards fiscal balance involves a series of challenges and adjustments. While the fiscal 2025 budget addresses immediate revenue gaps, further actions will be necessary to ensure long-term fiscal stability. By implementing expenditure cuts, revenue increases, and utilizing reserves, California is taking steps in the right direction. However, the state must remain vigilant in monitoring its financial health and be prepared to make necessary adjustments to align spending with revenue trajectories.