California’s record budget deficit is now $68 billion, after months of low tax revenue. This shortfall could lead to the deepest cuts in state spending since the Great Recession.

The nonpartisan Legislative Analyst’s Office released a new deficit estimate on Thursday that was far higher than the previous estimate of $14.3 billion. The deficit, which is highest in dollars but not overall spending as a percent, could cause the next legislative year to be thrown off balance by forcing the governor. Gavin Newsom, along with lawmakers in Sacramento, will have to cut spending on a level that few elected officials who are term limited have ever faced.

California’s state budget analysts, while not minimising the shortfall, said that the state has options for addressing the deficit, including using cash reserves, making one-time spending cuts and changing the way education is funded.

Gabriel Petek told reporters that the state is in a strong cash position. This was not the case at the beginning of the Great Recession. “We do not face the same liquidity challenges as we did at that time. I would therefore refrain from calling it a crisis.”

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The LAO predicts a drop of $4 billion in the amount the state must send to schools, community colleges and universities under Proposition 98. Education is now added to the list of possible targets to reduce funding that includes climate change and health care.

Analysts said that legislators could alleviate the situation by making one-time budget cuts, cutting school funding or tapping the $30 billion reserves. Last year, the legislative leadership considered drawing on its reserves. However, Newsom was against this idea and it was not done. The size of the deficit will likely increase the intensity of debates over reserve funds next year.

Analysts also predict annual deficits of $30 billion in the future. The LAO recommended that up to half the state’s reserve funds be left intact in order to mitigate future shortfalls.

Analysts were unaware of the amount of revenue available because the deadlines for filing taxes in California, which spanned from April to last month, had been delayed. They predicted that the revenue would fall $58 Billion short of their previous estimates, causing a massive deficit.

Newsom’s Department of Finance warned California earlier this year that it would continue to experience a revenue decline due to the stock market declines. Interest rate increases and inflation.

H.D., the department’s spokesperson, said that both the governor and the legislature face a major challenge in 2024. Palmer said in a press release following the LAO projections. The Administration will present their plan to close the gap in the budget when the Governor submits his proposal to lawmakers next month.

Newsom’s proposed budget will start negotiations on how to deal with the current financial situation. After years of huge surpluses, a smaller deficit in the last year forced Newsom to make the biggest cuts of his career. The state avoided further reductions by delaying expenditures and shifting money from the general to special funds.

Toni Atkins, Senate President Pro-Tem, said in an article that “our economy is still strong but we must be extremely cautious.” We are in deficit and so we will have to slow new programs down, as well as existing spending.

California could offset some of the cuts by delaying further spending, conditional funding on revenue rebounding, or shifting funds to bonds. There’s already a lot of competition for bond funding, as mental health is on the ballot in March and there are ballot proposals for housing, education and climate change.

California’s budget deficit could be reduced if the stock market continues to improve, which would generate additional capital gains tax. This would also show the financial stability of some of the businesses that the state depends on to generate revenue.

Jason Sisney wrote on LinkedIn earlier this week that “Stock Prices are important Leading Indicators for Future #CABudget Revenues and the indicators are Up.”

Newsom’s updated budget proposal in May will reveal whether and by how much these trends will reduce the state deficit.