SACRAMENTO — California overestimated what it thought would be a jaw-dropping $54 billion budget deficit, creating a one-time $26 billion windfall for lawmakers to spend next year, the state’s nonpartisan legislative analyst said Wednesday.

The state’s spending plan was upended this year by the coronavirus pandemic, which forced the closure of many businesses and prompted millions of people to file for unemployment benefits.

Unsure of the virus’s economic impact, the state Legislature approved a 2020-21 spending plan that tapped its savings account and relied on a combination of tax increases, spending cuts and deferrals to make up what policymakers believed would be a $54.3 billion deficit.

Economic Fallout Not as Severe as Feared

Legislative analyst Gabriel Petek said the state did too much, with the economic fallout from the virus so far not being as severe has lawmakers had feared.

While the pandemic has put millions of people out of work, most of them have been low-wage workers who earn less than $20 per hour. Petek said the people who earn more than $60 per hour and account for most of California’s tax payments have been largely unaffected financially, with many continuing to work from home.

The budget that lawmakers approved in June anticipated a 15% drop in tax collections because of the pandemic. But so far, tax collections are 9% higher than last fiscal year, with the state bringing in $11 billion more than expected. The result is a one-time windfall Petek estimates at $26 billion but said could fluctuate between $12 billion and $40 billion depending on what happens.

One Time Money

He warned that the money could only be spent once. Going forward, the state’s spending commitments are still more than it’s projected revenue, leading to a small operating deficit in 2020-21 that is expected to grow to $17 billion by 2025, Petek said. State revenue in 2021-22 would need to be $5 billion higher than projections to eliminate that deficit.

California’s budget year runs from July through June.

Adding to the uncertainty is the recent surge in coronavirus cases that prompted Gov. Gavin Newsom to impose tighter restrictions on most businesses and contemplate a statewide curfew that could trigger another round of job losses.

“Current unknowns about the economic outlook create an unprecedented amount of uncertainty about this fiscal picture,” according to an analysis released by the Legislative Analyst’s Office.

Petek recommended Newsom and the Legislature put half the expected $26 billion windfall into the state’s savings account and use the rest to address fallout from the pandemic.

Budget Chair: Report Offers ‘A Little Breathing Room’

Newsom will release his spending plan in January. Monday, he said his top priority will be “to support our small businesses that are trying their best to weather this storm.”

Democratic legislative leaders welcomed the news of the windfall but said they would be cautious. Senate President Pro Tempore Toni Atkins said “challenging times are not behind us.”

Phil Ting, Democratic chairman of the Assembly Budget Committee, said that while the improved outlook gives lawmakers “a little breathing room,” the state still needs help from the federal government to help with recovery. He said he would release a summary of the Assembly’s budget proposal next month.

“We cannot take our eye off the ball,” he said. “While the wealthiest individuals and corporations have gotten richer during the pandemic, there are millions more struggling Californians and businesses that need support to weather ongoing economic uncertainty.”