SACRAMENTO — From cruise ships to quarantines to school closures, California leaders have had plenty to worry about with the rapid spread of the coronavirus.
Add one more thing to the list: The state’s $222 billion annual budget.
“We’ve been waiting for a recession. This may be what triggers it.” — Assemblyman Phil Ting, chairman of the Assembly Budget Committee
California is home to some of the largest and most successful companies in the world and the executives who run them. That makes the state particularly vulnerable to short-term swings in the stock market, which is why state officials watched with concern Monday as U.S. stock indexes had their worst day since the start of the Great Recession in 2008.
“We’ve been waiting for a recession. This may be what triggers it,” said Assemblyman Phil Ting, chairman of the Assembly Budget Committee.
Nearly half of California’s personal income tax collections come from the top 1% of earners whose income mostly stems from capital gains, which in California are taxed the same as income.
Having revenues so closely tied to the stock market isn’t always a bad thing. As the Dow Jones Industrial Average broke records over the past two years, it has meant record surpluses for California, including an eye-popping $21 billion surplus in the current budget year. The extra money helped the state to expand its Medicaid program to cover adults living in the country illegally and offer first-in-the-nation subsidies to help middle-income families pay their monthly health insurance premiums.
But the market’s 20 percent dive from recent highs could mean trouble for California — the world’s fifth largest economy — if the losses persist.
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California Ties Revenue Estimates to S&P 500
Ting said Monday the state is already starting to miss its revenue projections. The last publicly available numbers show California beat its personal income tax collection estimate in January by more than $1 billion, giving the state a cushion.
Another projection is set for April, when a significant amount of taxes are paid as part of income tax filings. Gov. Gavin Newsom is then expected to issue his updated state budget plan in May based on those numbers. However, the April projection could be pushed back if the Trump administration delays the traditional income tax filing date of April 15 due to the coronavirus outbreak.
That would make it difficult for California to accurately estimate its revenues in time for lawmakers to vote on a spending plan in June, as required by law. Department of Finance spokesman H.D. Palmer said the state could still estimate revenues without that information.
California ties its revenue estimates, in part, to the S&P 500, a grouping of the top 500 companies in leading U.S. industries that professional investors use as as a thermometer of how stocks are performing. California predicted the S&P 500 index would average 3,120 for the second quarter of 2020. The index was at just below 2,739 on Wednesday.
“We don’t live and die by the S&P, but we are impacted by the S&P, perhaps more than many other states,” Newsom said. “We’re watching this closely.”
Daniel Morgan, senior portfolio manager for the investment firm Synovus Trust, said it is likely the market will be in flux for the next several months. Aside from spooking investors, coronavirus has caused other issues that are more deeply rooted in the global economy, including disrupting supply chains for tech companies.
California Is Projected to Have $18 Billion in Rainy Day Fund
“It has legs where it can keep coming back,” Morgan said.
Ting and others note the state is better prepared this time around to weather a potential economic downturn. The state was caught flat-footed in 2008 and had to cut state spending by 20%.
“I am not concerned at this point. I’m proud to say that the state of California is prepared better than we have been, ever.” — Sen. Holly Mitchell, chairwoman of the state Senate Budget and Fiscal Review Committee
Since then, voters have approved a new law that makes the state save money. Whenever the state has a bonanza of capital gains revenue, it has to automatically set some of it aside into a “rainy day fund” that lawmakers cannot touch it unless the governor declares a “budget emergency.”
California is projected to have $18 billion in the fund for the next budget year that begins July 1.
“I am not concerned at this point,” said Democratic state Sen. Holly Mitchell, chairwoman of the state Senate Budget and Fiscal Review Committee. “I’m proud to say that the state of California is prepared better than we have been, ever.”
California’s total reserves, when factoring in various other accounts, approach $21 billion. Palmer called that “an insurance policy against a potential downturn.”
“Does that mean zero cuts? No,” Palmer said. “But it means we are in a far better position to manage a downturn”than we have been in recent memory.”
