One Hundred Billion and Years of Red Ink Predicted for California

The nonpartisan Legislative Analyst’s Office warned lawmakers to start making hard budget choices now, before pandemic-induced deficits balloon to as much as $100 billion.

California Gov. Gavin Newsom discusses his plan for the gradual reopening of California businesses during a news conference at the Display California store in Sacramento, Calif. (AP Photo/Rich Pedroncelli, Pool, File)

SACRAMENTO, Calif. (CN) — On the heels of a nightmarish U.S. jobs report, California offered a second dose of abysmal economic news Friday as advisers warned the state’s budget troubles will persist through at least 2024.

In a report meant to guide lawmakers scrambling alongside the governor to piece together a budget by June 15, the nonpartisan Legislative Analyst’s Office pegged the state’s looming deficit between $18 billion and $31 billion. Instead of a speedy recovery, the report says the state will remain in the red for several years while paying off a potential deficit of over $100 billion. 

Without adequate reserves to fully cover gaps in the next budget, Legislative Analyst Gabriel Petek advises lawmakers to shun one-time actions and buckle up for an arduous recovery.

“Although the state faces a daunting budget deficit for the upcoming fiscal year, the multiyear situation is likely to be even worse,” Petek said in the report. “Relying only on one‑time solutions in this budget cycle will mean significant budget problems reoccur year after year.”

In recent years lawmakers have enjoyed the luxury of negotiating budgets with surpluses, due to a record stretch of job growth in wake of the Great Recession. But this time around, many in the state Senate and Assembly will face for the first time the reality of making tough cuts to social services and other programs of critical importance to their constituents.

California Governor Gavin Newsom handed the Legislature a loaded $222 billion spending plan in January that included items like $1 billion for housing, a $1.4 billion MediCal revamp to provide homeless people with mental health services, expansion of subsidized medical care to undocumented immigrants and $523 million to help pay for a minimum wage increase. Not only did Newsom propose the largest budget in state history, he additionally pitched voters on a $4 billion bond to ward against the ongoing effects of climate change.

As Newsom has acknowledged repeatedly in recent weeks, the coronavirus pandemic has squashed the ambitious budget proposal and lawmakers’ hopes of expanding social services. On Thursday, Newsom’s advisers issued a sobering report stating the governor was prepping a budget based on a record-high $54 billion deficit.  

Though still alarming, Petek’s report is mildly more optimistic as it predicts a smaller 2020-21 deficit than Newsom’s cabinet did under both economic scenarios used.  

With a more favorable U-shaped recovery where employment and tax revenues rebound sharply, Petek says the state would still face a $18 billion deficit. If the economy staggers well after the pandemic is over, the L-shaped rebound could cause a $31 billion hit.

Yet no matter which scenario plays out, Petek predicts the state’s budget woes will persist until at least 2023-24. He warns a rosier U-shaped recovery would still carry a $64 billion hit while a L-shaped recession could ultimately total $126 billion.

“Although much is unclear about the economy, we can be fairly confident that the state currently is in a deep recession. The budgetary impact of that recession will depend on its depth and duration, which are difficult to anticipate,” the report states.

Petek notes the Newsom administration’s estimate is considerably higher but said his office didn’t have the full information by Friday morning and could only make a few preliminary guesses for the discrepancy. He says Newsom’s forecast likely uses lower revenue estimates for an L-shaped recession scenario and is more focused on gross changes to the budget’s bottom line, while Petek’s aims to give lawmakers a “estimate of the baseline problem.”

Assemblyman Phil Ting, chair of the Assembly Budget Committee, says all options will be on the table over the next month.

“As we begin work on a new budget, the LAO’s analysis is no surprise. While there are slight differences with the Department of Finance over the size of the deficit, either way you slice it we have a significant shortfall to bridge over the next few weeks. All options will be on the table,” Ting said in an email.

Ting, D-San Francisco, highlighted the fact California was able to stock its reserves and pay off debt over the last years of former Governor Jerry Brown’s final term, and said he remains “confident” the state will rebound.

As the latest report from the U.S. Labor Department shows, both the country and California are reeling from job losses that exceed even the Great Recession. More than 4 million Californians have filed for unemployment and the California Department of Finance said it expects unemployment levels to surpass the Great Recession peak of 12.3%, eventually topping out at 18%.

The massive layoffs have stymied the state’s spring tax collections and quickly thrown the next budget into disarray. California’s general fund is extremely volatile as it relies largely on three revenue sources — personal income tax, sales and use tax, and corporation tax — making it a perfect victim for the complete lockdown ordered by Newsom seven weeks ago.

To address the gaping deficit and pass a balanced budget by June 15, Petek recommends lawmakers tap into the rainy day fund, reduce spending and shift costs until tax collection for the current fiscal year is completed in July.

“We encourage the Legislature to begin making these difficult, but necessary, decisions in June rather than waiting until future budget actions. Delaying action could only increase the size of the ultimate budget problem and make some solutions more difficult to implement,” the report concludes.

But Newsom says the full scope of California’s deficit will hinge not just on job growth and shifty budgeting, but the amount of federal relief granted by Congress and the Trump administration.

“We cannot do justice to the needs of 40 million Americans without the support of the federal government,” Newsom told reporters Friday. “The magnitude of the crisis that is beginning to take shape knows no state boundaries.”

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