The LAO on the longer-term state budget outlook

From the Legislative Analyst's Office: 

...Federal Budget Changes Likely to Create Additional Fiscal and Policy Pressure. The House of Representatives recently passed H.R. 1: One Big Beautiful Bill Act. If passed by the Senate and signed by the President, the legislation would make a variety of changes to federal spending. The impacts on the state budget generally fall into two categories: (1) direct General Fund costs and (2) reductions in federal funding that create state budget pressure. Changes with direct General Fund costs include many changes to Medicaid and food assistance. These have the potential to directly increase state General Fund costs in Medi-Cal and CalFresh by billions of dollars annually. In addition, some of the changes included in the bill would create budget pressure to the extent the state considers creating “state-only” programs for individuals no longer eligible for federal-state partnership programs. Other areas that could create state budget pressure include reductions to federal support for drinking water projects, zero-emission vehicles, and flood protection. The May Revision appropriately excludes the potential fiscal impacts of pending federal actions, as these effects remain uncertain. We encourage the Legislature to keep these potential fiscal pressures in mind, however, as it crafts the final budget package.

Future Budget Problems Likely to Become More Difficult to Solve. This May Revision marks the third consecutive year the Legislature has needed to close a budget shortfall. While the Governor’s proposal makes some progress toward narrowing the state’s persistent multiyear gaps, both our office and DOF project continued multiyear deficits. These shortfalls will become increasingly difficult to resolve over time, as the state has already relied on the least disruptive solutions—such as reducing one-time and temporary spending, drawing down reserves, and increasing borrowing—although notably the state still has $11 billion in reserves under the May Revision proposals. To balance the budget going forward, the Legislature will likely need to adopt additional solutions that increase ongoing revenues or reduce ongoing spending—both of which involve the most difficult and consequential trade-offs for policymakers. Further, although there is a possibility that revenue growth could ease future deficits, it is equally likely that the budget problem will grow larger than our forecast suggests. In short, the Legislature faces a challenging budget landscape in the years ahead.

Full report at https://lao.ca.gov/Publications/Report/5052.