A new memo Thursday from California’s finance department put the economic damage of the coronavirus pandemic in stark relief: a projected $54.3 billion hole in the state budget that’s nearly three and a half times the state’s Rainy Day Fund emergency reserves.
“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 May 7 fiscal update said.
Newsom, who ordered the country’s first statewide stay-home order March 19 to slow the virus’ spread, hinted Wednesday at the mounting economic toll of shutting all but essential businesses.
“You’re going to see a budget coming out tens of billions of dollars short of where it needs to be,” said Newsom in his daily news briefing, which today is expected to cover the easing of restrictions to allow some businesses to reopen. “These numbers are jaw-dropping, and it is alarming. I just hope people are preparing themselves.”
The report is a stark turnaround from the beginning of the year, when California and the rest of the country were riding high on an economy that was firing on all cylinders.
“California began 2020 with a strong bill of financial health — a strong economy, historic reserves, and a structurally balanced budget,” the fiscal update noted.
The state’s 3.9% unemployment rate at the beginning of the year was one-third of the 12.3% at the depths of the Great Recession that followed the 2008 mortgage meltdown. The state eliminated its “wall of debt” from past budgetary borrowing, and began making supplemental payments to its underfunded employee retirement plans.
The 2020-21 budget had reflected a $5.6 billion surplus, with a record level of reserves of $21 billion,including $18 billion projected in the state’s Rainy Day Fund. Revenues through March ran $1.35 billion above January’s projections, as markets outperformed the budget forecast.
But “the widespread economic interruption caused by the global pandemic is unprecedented in modern history,” the report said. Unemployment has soared under the state and local coronavirus lockdowns. The state projects the 2020 unemployment rate will be a staggering 18% percent, much higher than during the Great Recession. California personal income is projected to fall by nearly 9% on an annual basis in 2020.
Those job losses and business closures will sharply reduce state revenues, the report said. Compared to the January forecast, the state’s three main general fund revenue sources for basic services are projected to take a dive in the 2020-2021 fiscal year.
Personal income tax is expected to fall by 25.5%, sales tax 27.2% and corporate taxes 22.7%.
General fund revenues are expected to plummet by $41.2 billion below January projections, including 9.7 billion in 2019-20 and $32.2 billion in 2020-21.
Under Proposition 98’s constitutional calculation, that will shrink required funding for K-12 schools and community colleges by $18.3 billion.
The $41.2 billion revenue drop, combined with $7.1 billion in caseload increases supporting health and human services programs and other coronavirus costs totaling some $6 billion add up to “an overall budget deficit of approximately $54.3 billion,” the report said.
However, the report concludes that 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,” which it attributes to “the state’s prudent fiscal management and strong economic recovery since 2011.”
