California is predicted to have a record-setting budget surplus this year.

In the short term, state lawmakers will have to decide how to spend the projected $68 billion, but to avoid future budget problems, they’ll need to decide whether to cut taxes or change the state spending limit.

As KTLA sister station, KTXL, reported last week, the independent Legislative Analyst’s Office has warned lawmakers that over time the state will not be able to handle the continued triggering of the state appropriations limit, a formula that was set in 1979.

“This is not a situation we can grow ourselves out of. In fact, the more the revenue grows it could exacerbate this situation,” said Gabe Petek, with the LAO.

Each extra dollar over the limit becomes associated with nearly double that amount in required spending. Now back to back years of triggering the limit, that required spending could grow out of hand and send the state into future budget deficits — regardless if the economy grows or hits a downturn.

“Absent a significant recession that resets our revenue base at a much lower level, we really see this as continuing to be a recurring issue over the next several years,” Petek said.

The LAO said there are two long-term solutions for the legislature and governor to consider, either reducing taxes over time or asking voters to change the limit.

“We didn’t take a position on which one is more effective. Certainly, times have changed since the 1970s. We get a lot of our revenue from the higher-income taxpayers. We have a progressive tax structure, so what tends to happen is our revenues are predisposed to growing faster than the formula that calculates the limit,” Petek said.

Democratic leaders in the state Senate said they’re prepared to take the issue to voters in 2024. 

In a statement Friday, the office of Senate Pro Tem Toni Atkins said in part, “if the constitutional conflicts are not resolved, then dramatic cuts will need to be made to core baseline programs – such as healthcare, higher education, and public safety – or even worse, Proposition 98 would need to be suspended perennially.” 

Proposition 98 sets a minimum funding level for K-12 education.

Meanwhile, leaders in the state Assembly are still working on their budget outlook. Republicans in that house prefer the tax cut option.

“We have taxed Californians too much. We need to return that money back to the people and let them keep their hard-earned money,” said Assembly Member Vince Fong, R-Bakersfield.

Gov. Gavin Newsom’s office said on Friday it’s waiting on updated revenue forecasts from the Department of Finance before commenting on the issue.