Fiscal Nightmare: California Budget Shortfall Could Reach Staggering $54 Billion

With a projected $41 billion drop in tax revenue and an unemployment rate that could soar to 18%, California — once flush with cash in its $22 billion rainy-day fund — will be far less golden thanks to the Covid-19 pandemic.

A screenshot of California Gov. Gavin Newsom giving his daily coronavirus press briefing.

SACRAMENTO, Calif. (CN) — With millions already jobless, California’s pandemic-induced recession is on pace to shatter previous downturns and could lead to a record $54 billion budget shortfall, state officials warned Thursday.

The California Department of Finance said it expects the state’s main revenue sources to decline by more than $41 billion compared to January predictions. The vanishing income, sales and corporate taxes — combined with an estimated 18% unemployment rate — reflect the disastrous economic toll already caused by the novel coronavirus.

“The Covid-19 pandemic has caused enormous hardship for families, businesses and governments across the world, the United States and California. It has endangered health, stressed the health care system, and caused devastating losses in family and business income,” the department states in a grim 4-page report.

“Covid-19 has caused a national recession, a precipitous decline in income, rapidly rising health and human services caseloads and substantial Covid-19 driven costs.”

The report comes one week before Governor Gavin Newsom is required to give lawmakers an updated budget for 2020-21 fiscal year. Unlike the ambitious $222 billion version released in January, which was banking on a $5.6 billion surplus, the so-called “May Revise” will contain wholesale cuts and a lack of new spending programs.

While legislators remained mostly tight-lipped Thursday about what programs could be sacrificed on the budgetary chopping block, the state’s court leaders have been bracing for a blow.

In a statement Thursday, Consumer Attorneys of California president Micha Star Liberty said the courts have already struggled to recover from budget cuts made during the Great Recession.

“New funding cuts would slow civil justice to a crawl, impacting the livelihood of citizens across the spectrum. We urge the federal government to put aside politics and step up with financial assistance to states across the nation suffering under the yoke of the coronavirus pandemic. A swift and effective recovery depends on maintaining the operational vitality of states. Without it, the fiscal malaise will almost certainly outlast the viral threat,” Liberty said.

Judith McConnell, Administrative Presiding Judge for the Fourth Appellate District, said at a State of the Appellate Courts address Tuesday that this is the third budget crisis she has faced during her tenure and it would likely be the worst faced by California courts.

“It’s not going to be good. It’s going to be terrible,” McConnell said.

San Diego County Superior Court executive officer Michael Roddy said during a State of the Court address last week the court was “planning for the worst and hoping for the best,” regarding potential cuts to the court.

Assemblyman Phil Ting, chair of the California Assembly budget committee, said in a conference call Thursday while the state may “never have enough reserves to avoid making cuts,” he was “proud” California’s fiscal conservatism since recovering from the Great Recession allowed the state to build a historic rainy day fund now projected around $16 billion.

“We have a lot of lessons that we learned from the 2008-2009 recession. That budget had a significant adverse impact on low-income and working households and we’re seeing the same thing with the pandemic,” Ting said.

“At a time when people need government the most, which is any recession, is also the time we have limited ability to help … From state budgetary point of view we have a larger ability to get through this than many families who have no savings, no jobs, and are one Covid illness away from going bankrupt,” Ting added.

He said the state would likely make cuts to some of the programs Newsom has implemented so far during his first term in office, including early childhood education.

While legislators have been working for years to reduce the state’s prison population and the significant funding it takes up, Ting said consolidating and closing some prison facilities is a priority that will at least be temporarily abandoned to comply with social distancing requirements necessary to curb the spread of coronavirus.

Ting said in addition to budget cuts, the state will look at options for raising revenue, including a proposed nicotine tax on e-cigarettes.

But Ting cautioned the upcoming fiscal budget is unlikely to take the hardest hit due to the pandemic; he said he was most concerned about the 2021-22 fiscal budget since California stands to recover some money this year from reimbursements issued by the Federal Emergency Management Agency.

According to Thursday’s memo, California schools could be the biggest loser: if tax revenues don’t quickly rebound, general funding for K-12 schools and community colleges could see a $18 billion hit.

During a conference call Thursday, state Sen. Holly Mitchell, chair of the special budget subcommittee on California’s Covid-19 response, said it was “premature to make any assertions of what programs will get cut.”

“My job is to make sure we protect the vital programs and services all California residents need,” Mitchell said.

“We will not exacerbate the problem by gutting programs families are relying on,” Mitchell added.

California’s general fund relies largely on three revenue sources — personal income tax, sales and use tax, and corporation tax. Newsom’s advisers now predict tax revenues will plunge a combined $41 billion compared to the figure used to craft the January budget, not to mention the $6 billion the state plans to spend this year fighting the pandemic. 

The report also expects the middle and lower class to be specifically harmed, as many layoffs have occurred in low-wage industries.

Over 4 million have already filed for unemployment, but the Newsom administration is planning for 2020 unemployment levels to surpass the Great Recession peak of 12.3% and top out at 18%. Furthermore, personal income could plunge by 9% and permits for new housing, a key economic indicator, could drop by over 20% this year.

“The May revision forecast projects that the impact of these economic losses will be disproportionately borne by low- and middle-income Californians. This is particularly concerning as state median income did not return to the pre-Great Recession level until 2018,” the report continues.

The predictions are incredibly jarring and unprecedented, but Newsom’s advisers note the projected deficit as a percent of the general fund budget is slightly smaller than budgets pieced together in 2003 and 2009.

On Friday, the Legislative Analyst’s Office is also expected to release its 2020–2021 fiscal outlook, which will provide an update to the fall outlook on the state budget’s condition.

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