Perfect budget storm: Virus, joblessness, weak tax receipts

The rise of unemployment, dwindling tax revenues, emergency spending to fight COVID-19 and renewed fears of wildfires this year are throwing deep strains on the state budget for the new fiscal year that starts just weeks from now.

Gov. Newsom proposed a $222 billion budget for 2020-21, but he has said the document will be rewritten to factor in the new costs of the coronavirus pandemic — estimated thus far at about $7 billion — and the surge in joblessness, which is expected to soon hit at least 12 percent in California, according to the Legislative Analyst. Nationally, unemployment currently is about 14.7 percent.

But in March, the jobless rate rose to more than 5 percent, up from February, and more increases are expected.

Before the coronavirus struck, California was not only expecting a strong fiscal year but was on the upswing with a record low in unemployment and paying off debt and covering deferred expenses. The budget reserve stood at about $21 billion. Typically, the draft budget is tweaked in May to reflect income tax receipts.

This year, it will be more than tweaked – it will be completely rewritten to reflect hard fiscal realities.

“This year I will be doing a May revise looking at tens of billions of dollars in deficit,” Newsom said at a briefing. “We just went tens of billions in surplus in just weeks to deficits,” adding that “the next few years we’re going to have to work through these challenges…we’ll work through them and  we’ll get out the other side.”

But in March, the jobless rate rose to more than 5 percent, up from February, and more increases are expected.

During the Great Recession, California experienced 43 months of double-digit joblessness, from February 2009 to August 2012.

Legislative Analyst Gabriel Petek, the Legislature’s nonpartisan fiscal adviser, said unemployment had risen sharply – driven in part by the tourism and retail sectors — and was projected to hit 12% to 15%. “While we don’t yet know the extent or duration of this downturn, past experience does suggest to us that the fiscal effects will persist for several budget cycles.”

Others are more pessimistic:  Economist Jeff Michael of the University of the Pacific said projected an 18.8% unemployment rate.

During the Great Recession, California experienced 43 months of double-digit joblessness, from February 2009 to August 2012.

LAO fiscal analyst Anne Hollingshead told lawmakers that “under a “typical” recession (e.g., an average-sized recession from the post-World War II period) California would expect to have $20 billion in lower revenue in 2019-20 and 2020-21, with an additional $30 billion lower revenues in subsequent years.

“If revenue losses were similar to the experience of the Great Recession, it would suggest a $35 billion revenue loss in the budget window and an additional $85 billion over the next few years,” she said.

Newsom projects a $54 billion shortage, while Petek puts the deficit at $18 billion to $31 billion. Both say it could take years to recover fully.

Finance Department Director Keely Bosler, who writes the governor’s budgets, recently told a gathering at the  California Chamber of Commerce that the department intends to “build a strong foundation [with the] highest levels of reserves” to ensure a “structurally balanced” budget.

In light of the unexpected fiscal pressures stemming from COVID-19, how will such changes affect the formerly balanced budget?

Newsom projects a $54 billion shortage, while Petek puts the deficit at $18 billion to $31 billion. Both say it could take years to recover fully.

From Gov. Newsom’s announcements of implementing paid sick leave benefits for food sector workers,  $42 million to protect foster youth and families, and $100 million to support child care services for essential workers and vulnerable populations, the unforeseen expenses continue to pile up. Governor Newsom addressed such financial ramifications as placing California “in a pandemic-induced recession” in dealing with the outbreak.

Wildfires, which are near-annual major disasters in California, also will require costly state resources, especially during a pandemic. Firefighters’ base camps, for example, might have to be dramatically expanded at specific fires to allow for social distancing. One official estimated the camps might have to be quadrupled in size.

Finance Department official Vivek Viswanathan estimated the state will incur “approximate $7 billion in expenditures relating to COVID-19 for 2020.”

The Special Budget and Fiscal Review Subcommittee on COVID-19 Response called representatives from the Finance Department, the LAO and others into a hearing — maintaining social distance measures — to ponder state responses and fiscal decisions.

In the Senate, up for discussion is $25 billion emergency plan to provide relief for renters and early-payment vouchers to taxpayers.

Finance Department official Vivek Viswanathan estimated the state will incur “approximate $7 billion in expenditures relating to COVID-19 for 2020,” but he cautioned that his projection is uncertain because of daily informational changes and updates.

But one thing is certain, he said: The combination of this health crisis, stay-at-home measures and drop in economic activity have all combined to create  “a significant negative effect in state revenues, both in the current year as well as in the upcoming budget year.”

Patek said COVID-19 has already forced California into a recession, and noted that March represented the “largest one month increase in the unemployment rate since 1975.” In March, California’s jobless rate was 5.3 percent.
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Editor’s Note: Sabrina Zunich is a Capitol Weekly intern from UC Davis.