California is facing a $54.3 billion budget shortfall that will likely mean tax increases and deep cuts to education funding, Gov. Gavin Newsom’s administration warned on May 7.
Assemblyman Phil Ting (D-San Francisco), chairman of the assembly budget committee, said in a news conference the same day that the state’s reserve fund is about $16 billion, only a third of what the state needs to cover the projected deficit.
“It’s devastating, because at a time when people need government the most, which is any recession, it’s also the time when we have limited ability to help,” Ting said.
In May 2009, amid the Great Recession, then-Gov. Arnold Schwarzenegger had announced a $24 billion budget shortfall—less than half of what we’re seeing this May.
California’s unemployment rate was between 10 and 13 percent during the Great Recession. The state projects 2020’s unemployment rate will be 18 percent.
While all indicators of financial trouble are worse than the Great Recession—including lower personal income, business revenue, and property income—help is expected to arrive more quickly.
Ting said the state is relying heavily on the Federal Emergency Management Agency (FEMA) for funding. “We’ve always been assuming for much of what we are spending this year to manage COVID-19, about 75 percent of that would get reimbursed by FEMA,” he said.
“So, it’s not so much a budget issue; it’s more of a cashflow problem for this current fiscal year.”
Nonetheless, as with the Great Recession, balancing the budget will require cuts.
The deficit will likely mean an $18.3 billion cut in spending for public schools and community colleges, according to a fiscal update issued May 7. The cut to education comes because of the “Classroom Instructional Improvement and Accountability Act,” which mandates the amount of education spending relative to the budget.
Tax Revenues Expected to Fall
State general fund revenues from taxes are expected to fall $41.2 billion compared to Newsom’s proposed budget in January.
Finance department officials expect personal income among Californians to plummet about 9 percent. And new housing construction is likely to drop more than 21 percent.
The Newsom administration asked the federal government “to help states and local governments support an effective response to COVID-19, a timely and fact-based modification of the stay-at-home order, and a safe, expedited economic recovery,” the May 7 memo states.
When the pandemic was escalating in February, Newsom had been confident in the state’s ability to weather the storm. In a Feb. 27 briefing, he had said, “there is no better resource state in America to address this issue head-on.”
“I am not worried about the money,” Newsom said at the time. “I’m not worried about resourcing this response—we are well-resourced as a state. We are running record reserves and running surpluses.”
The state was in a better position financially this year than it was ahead of the Great Recession.
A Legislative Analyst’s Office analysis of the Great Recession recovery notes that the troubles at that time caused the state to restructure its finances for greater resiliency in the future.
That analysis, published in 2018, states “ the state is much better prepared for a recession today than it was when it entered the Great Recession ten years ago.” It cites a $2 billion reserve deficit in 2007 compared to a reserve level of $16 billion in 2018 (the same level for 2020).
It took the state four years to recover from the Great Recession in the sense of having its first budget without a major shortfall in 2013.
The Department of Finance’s May 7 update states, “While the COVID-19 Recession is causing an unprecedented loss of jobs and income, the projected deficit as a percent of General Fund spending is modestly smaller than the budget deficits faced by the state in 2003 and in 2009.”
It does express concern about the impact the current recession will especially have on the low- and middle-income Californians. The state median income had only just returned to pre-Great Recession levels in 2018.
Ting said the state may consider extending unemployment benefits for when the federal additional benefits expire “probably in the fall.”
“If they can keep people financially afloat over the next year or two years, rather than putting them on the street, and sort of making them homeless or driving them into some other larger levels of debt or poverty, it means that these are families that we don’t have to assist in the long run, if we can just help them stay on their feet,” he said.
Asking for More Detailed Accounting
Ting said he has urged the finance department to “stop spending money in an ad hoc way, but give us a budget proposal.” He has asked for daily updates.
“My understanding is that they’re going to give greater detail as to where they believe the expenditures will be over the next few months in the [May] Revise,” Ting said.
The May Revise is a revised budget proposal submitted each year by the governor after a series of hearings on the initial January proposal. This year the revise, expected to be released May 14, takes on greater significance with unprecedented changes occurring between the initial and revised proposals.
“This is an emergency unlike anything else we have seen,” Ting said. “Usually the emergency affects thousands of people or a few million people. This pandemic [has] affected all 40 million Californians, and so the authority became fairly broad.”
Newsom has had greater authority in this state of emergency to make financial decisions without consulting the Legislature.
Newsom came under fire recently over a controversial $1 billion deal with Chinese company, Build Your Dreams (BYD), for protective N95 masks and surgical masks. The deal has shown signs of being problematic, as BYD had to refund the state for masks that did not meet quality standards.
“It’s very difficult to do oversight on expenditures or to conduct business,” Ting said. “It’s just not how the state is set up. We’re not accountants or auditors. We are legislators that provide broad oversight.”
Reopening the Economy
If the stay-at-home order lasts longer than expected, or if there are more severe outbreaks of the disease, the economic fallout could get even worse, Ting suggested.
“The budget is going to be impacted the longer we have to stay at home or people are afraid of going out,” he said. “Until we have certainty, or a vaccine, or herd immunity, it’s going to be very difficult to go back to normal. And, if we’re not back to normal, it’s going to have an impact on our economy.”
Also on May 7, Newsom unveiled conditions for the re-opening in the state’s economy, prompting a joint statement from Sen. Jim Nielsen (R-Tehama) and Assemblyman James Gallagher (R-Yuba City).
“We listened and followed the Governor’s orders to stay home to protect the elderly and those with underlying health issues. Now, we must focus on the other crisis—our economy,” the statement reads.
“Californians need to safely get back to work, without setting up unworkable barriers that prevent people from making a living,” they said. “Allowing people to safely return to work is the only way to get the state out of this eye-popping deficit.”
