California Doom: Staggering $54 Billion Budget Deficit Looms
SACRAMENTO — California will have a budget shortfall of $54.3 billion because of the economic devastation wrought by the coronavirus, Gov. Gavin Newsom’s administration announced Thursday, a stunning reversal for a state that had a $21 billion surplus a year ago.
The state has been under a mandatory stay-at-home order since mid-March, forcing nonessential businesses to close and prompting more than 4 million Californians to file for unemployment benefits. After recording record low unemployment of 3.9% at the start of the year, the Newsom administration now predicts a jobless rate of 18% for the nation’s most populous state — 46% higher than the height of the Great Recession a decade ago.
Newsom hinted at the bleak numbers on Wednesday when he called the unemployment figures “Depression-era numbers.”
“These numbers are jaw dropping,” Newsom said. “I just hope that people are preparing themselves … for the effort that we all need to engage together to undertake to unwind that and get back on our feet.”
It’s not yet clear what state programs will be cut or by how much. Newsom is scheduled to reveal his new spending proposal next week. But the revenue shortfall means the state’s constitutionally required funding level for public schools and community colleges will fall by $18.3 billion.
The virus-induced business closures, unemployed workers and cratering of the restaurant, tourism and entertainment industries has resulted in a staggering loss of tax revenue for California. The Newsom administration projects personal income will fall by close to 9% for the state’s nearly 40 million residents while permits for new housing construction — a key measure of the economy’s health — will drop more than 21%.
After facing budget deficits of more than $40 billion following the Great Recession, California lawmakers have been saving money for the next economic downturn to try and avoid a repeat of cuts to state services. For the past 10 years, the state has had an unprecedented run of economic growth, adding more than 3.4 million new jobs.
General Fund Revenues Will Decline by $41.2 Billion
That led to increased state spending and huge budget surpluses in recent years, pushing the state’s “rainy day fund” to more than $16 billion. But the projected budget shortfall announced Thursday is nearly three-and-a half times that number, dispelling any notion of a quick recovery once the state’s coronavirus restrictions are lifted.
The Newsom administration estimates state general fund revenues will decline by $41.2 billion compared to the $222.2 billion spending proposal Newsom revealed in January. Plus, California must pay for an extra $7.1 billion for increased enrollment in some social safety net programs, including Medicaid, the joint state and federal health insurance program for the poor and disabled.
Another $6 billion in anticipated emergency spending on the coronavirus for things like protective gear, hotel rooms for the homeless, and cash payments for low-income adults living in the country illegally pushes the projected deficit past $50 billion.
Meanwhile, lawmakers are already being asked to bail out the state’s essential industries. California hospitals say they have lost up to $14 billion by postponing elective surgeries and other procedures to make room for an anticipated surge of coronavirus cases that never happened. On Monday, the California Hospital Association asked lawmakers for more than $1 billion in aid.
Local governments, reeling from disappearing sales and hotel tax revenue as millions of people stay inside, are also asking lawmakers for billions in aid.
California already is in line to receive more than $26 billion in federal aid because of the coronavirus, according to an analysis by the nonpartisan Legislative Analyst’s Office. But in a memo released Thursday, the Newsom administration says the state’s bleak financial outlook “underscores the necessity of further federal stimulus to help states and local governments.”
“The next few years we’re going to have to work through these challenges,” Newsom said Wednesday. “But we’ll work through them. And we’ll get out the other side.”
5 Questions About California’s Projected Budget Deficit
Newsom says the state will have a $54.3 billion budget deficit because of the coronavirus. It would be the largest state shortfall since the Great Recession. Here are five key questions:
WHY DOES CALIFORNIA NOT HAVE ENOUGH MONEY?
California gets most of its money from taxes on retail sales and the income of individuals. But most retail businesses are closed because of the coronavirus pandemic and more than 4 million people have filed for unemployment benefits, meaning they don’t have salaries for the state to tax. Individual tax collections are predicted to fall by more than 25% while sales taxes could fall by more than 27%.
DOES CALIFORNIA HAVE MONEY IN RESERVE TO HELP CUSHION THE BLOW?
Yes, but it’s not nearly enough. The state has $16 billion in its rainy day fund. The projected deficit is nearly $55 billion.
WHAT SERVICES WILL GET CUT?
An updated spending plan is expected next week. But the amount of money lawmakers are required to spend on public schools and community colleges will fall by $18.3 billion.
IS THIS THE LARGEST BUDGET DEFICIT IN STATE HISTORY?
As a percentage of state spending, it is smaller than some of the deficits the state faced during the Great Recession.
HOW DOES UNEMPLOYMENT IN THIS DOWNTURN COMPARE TO THE GREAT RECESSION?
California’s unemployment rate reached 12.3% at the height of the previous downturn. it could reach 18% this time.