LAO Publication: The 2026-27 Budget – California’s Fiscal Outlook 

Yesterday, the Legislative Analyst’s Office (LAO) released their annual publication, 2026-27 Budget: California’s Fiscal Outlook.  

The LAO is the California Legislature’s nonpartisan fiscal and policy advisor. The LAO’s annual Fiscal Outlook publication provides an independent assessment of the California state budget condition for the upcoming fiscal year. The publication also includes a forecast of the state’s longer-term condition, typically a three-year period following the upcoming fiscal year. The 2026-27 Fiscal Outlook includes the LAO’s assumptions about the state’s economy for fiscal years 2026-27 through 2029-30, and how the state’s economy affects the state’s annual revenues and expenditures.  

At this time, the LAO forecasts a state budget deficit of $18 billion for fiscal year 2026-27, which is $5 billion higher than anticipated in June 2025. The LAO reports that although revenue estimates are $11 billion higher than assumed in the 2025 Budget Act, these gains do not, on net, improve the state’s bottom line. This is because constitutional spending requirements under Proposition 98 (school and community college funding) and Proposition 2 (reserve deposits and debt repayments) almost entirely offset revenue gains. The LAO also estimates costs in other programs to be roughly $6 billion higher than anticipated.  Furthermore, the LAO projects the structural deficits to grow to about $35 billion annually starting in 2027-28 due to spending growth continuing to outpace revenue growth.  

The LAO also comments on the larger-than-expected budget problem, the absence of a recession assumption in prior estimates, and the state’s reliance on most of its budget resiliency tools to address previous deficits as critical points to consider when addressing the coming budget problem. The LAO also advises the Legislature to address the budget problem through a combination of ongoing solutions, namely through achievable spending reductions and/or revenue increases.  

As state and federal funds account for nearly half of county revenue on average, fiscal forecasts and analysis of the state’s economic condition can help counties prepare balanced and sustainable budgets. 

Looking ahead, Governor Newsom will announce his Administration’s proposed state budget for 2026-27 and the state’s updated revenue forecast by January 10, 2026. CSAC will continue to monitor the state’s economic condition and keep counties informed of economic assessments that may aid in preserving fiscal sustainability in the years ahead.  

Please contact Emma Jungwirth or Julissa Ceja Cardenas with any questions or feedback.