LEGISLATION COMMITTEE
Meeting Date: December 9, 2024
Subject: Special Session of Legislature, State Budget, November Election Results
Submitted For: Legislation Committee
Department: County Administrator’s Office
Referral No: 2024-03
Referral Name: State Matters of Interest
Presenter: G. Neill and M. Rubalcava, Nielsen Merksamer
Contact: L. DeLaney, 925-655-2057
Referral History:
The Legislation Committee regularly receives reports on the status of the state budget, election results, and legislative activity.
Referral Update:
(A New) Special Session
After noon on December 2, each house of the Legislature formed as a body as required under the constitution, swore in new members, retained their leaders from the past year, and gaveled in for a special legislative session to fund litigation against the incoming Trump administration.
Lawmakers immediately introduced budget legislation that would set aside upwards of $25 million for the Department of Justice and other state agencies to defend themselves in court, to file lawsuits, and to carry out state executive orders to mitigate President-elect Donald Trump’s actions. It would also immediately provide $500,000 for the state to begin preparing its legal cases. A competing proposal would fund the $25 million request and add on $10 million for county counsel and city attorneys to defend themselves in court.
Lawmakers will return in January and plan to pass the bill in time for Gov. Newsom to sign it before President-elect Trump’s inauguration on Jan. 20. Other priorities and direct responses to the Trump administration could be introduced in the regular session, which is running concurrently with the special session.
California sued the first Trump administration more than 120 times, and the next four years could see a repeat as President-elect Trump is likely to attempt to roll back progressive policies enacted by California lawmakers.
LAO Publication: The 2025-26 Budget - California’s Fiscal Outlook
In late November, the Legislative Analyst’s Office (LAO) released their annual publication, The 2025-26 Budget: California’s Fiscal Outlook. (See Attachment A.)
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 2025-26 Fiscal Outlook includes the LAO’s assumptions about the state’s economy for fiscal years 2025-26 through 2028-29 and how the state’s economy affects the state’s annual revenues and expenditures.
At this time, the LAO describes 2025-26 as “roughly balanced” and forecasts a state budget deficit of $2 billion. The forecasted deficit is smaller than originally anticipated, which the LAO attributes to the actions of the Legislature and the Administration in early 2024 to reduce expenditures in 2024-25 and 2025-26. The relatively small deficit is also the result of improved income tax revenues offset by forecasted increases in expenditures (despite the proactive budget-balancing actions made in spring 2024). The LAO expects revenue projections to exceed June 2024 estimates by about $7 billion and estimates higher spending of about $8 billion. The increased expenditures are the estimated cost of recent legislation and propositions approved at the ballot in November.
Even though the state is experiencing a soft labor market and weak consumer spending, the LAO suggests strong growth in total pay to workers is driving the state’s income tax receipts. Total pay grew at a well above-average rate in the first half of 2024. The first quarter was especially strong, with 17 percent annualized growth in total pay, among the sharpest quarterly growth rates on record. Income tax receipts have followed suit, with withholding collections nearing 10 percent growth so far this year.
Special forms of pay for high-income workers seem to be driving this increase in total pay. The recent run-up in the stock market, which appears tied to optimism surrounding artificial intelligence, is a primary driver of the rapid growth in pay to high-income workers. Stock compensation has become an important form of pay among California’s high-income workers, especially those at major technology companies. In the first half of 2024, stock pay alone at four major technology companies accounted for almost 10 percent of the state’s total income tax withholding. Because this form of compensation is tied to the company’s stock price, it rises when stock prices rise. Other forms of pay, such as bonuses to workers in the financial sector, also tend to rise when financial markets are doing well. Early evidence suggests this has been the case in 2024.
For the three-year period following the upcoming fiscal year, the state’s fiscal condition is expected to be considerably more challenging. The LAO forecasts an annual operating deficit between $20 billion to $30 billion for 2026-27, 2027-28, and 2028-29. The LAO does not include any predictions regarding anticipated changes in federal policy that may affect California’s fiscal condition.
Looking ahead, Governor Newsom will announce his Administration’s proposed state budget for 2025-26 and the state’s updated revenue forecast by January 10, 2025.
Election Results
See Attachment B.
Some interesting aspects of this joint class of newly elected members and carryover members:
• For the first time in California’s history, the State Senate reaches gender parity, and the Assembly installs Asm. Aguiar-Curry as Assembly Majority Leader and incoming Chair of the Legislative Women’s Caucus;
• More than 50 percent of the State Legislature has two years or less in office, bringing various levels of governing experience into their roles as state lawmakers.
• While Democrats still have a supermajority in both chambers, Republicans flipped three legislative districts in the Inland Empire, Coachella Valley and Orange County.
Recommendation(s)/Next Step(s):
RECEIVE the report and provide direction and/or input to County staff and the County’s state lobbyists, as needed.
Fiscal Impact (if any): None.