Even when the coronavirus health threat recedes, California will face a severe recession that will hammer state and local government budgets.
Gov. Gavin Newsom says he sees light at the end of the coronavirus tunnel, when Californians regain “a semblance of normalcy,” emerge from their homes, converse verbally rather than electronically and return to their jobsites.
The date of that happy day is still very uncertain. Moreover, true recovery also will require Newsom and the state he governs to traverse another dark tunnel of severe economic recession and state and local government budgets swollen by crisis-related spending while experiencing declining tax revenues.
Last week, Newsom’s Department of Finance released a preliminary report on the state budget. “The economic disruption from the pandemic is expected to result in a recession and have significant negative effects on state revenues,” it said. “Concurrently, the drop in the stock market may cause further revenue declines.”
“This impact is expected to be immediate, affecting fiscal year 2019-20, and will continue in to fiscal year 2020-21 and additional years depending on the pace of recovery of local, state and national economies.”
The Legislature gave Newsom $1 billion to fight the pandemic and his budget staff anticipates that another $6 billion will be needed this year. Much of it is likely to be reimbursed by the federal government, but the fiscal impact will still be heavy — especially since revenues are also expected to drop sharply.
During the Great Recession, the state saw about a 20% revenue decline and ran up multi-billion dollar deficits, creating a “wall of debt” that Jerry Brown confronted upon returning to the governorship in 2011.
The revenue hit from the virus-induced recession could be even heavier this time because the state is now even more dependent on the wealthiest 1% of income taxpayers, whose taxable incomes are largely investment profits. The one-percenters account for about a third of the state’s general revenues.
The 2020-21 budget that Newsom proposed in January has been set aside. His budget staff is now drafting a replacement to be unveiled in May, the traditional time for fine-tuning the annual plan prior to final negotiations and legislative adoption by the June 15 constitutional deadline.
While an entirely new budget will be offered, one to include the massive new spending for virus-related activities, officials will not have a clear idea of revenues because of another new development — postponement of the income tax filing deadline from April 15 to July 15.
The May budget revision traditionally reflects revenue information from April 15 tax filings, but the three-month delay will compel Newsom and legislators to base the budget on estimates of recession’s impact rather than hard data.
The June 15 deadline will be met — legislators will lose their salaries if they miss it — but their budget will likely be a placeholder to be updated repeatedly as outgo and income wax and wane.
Still another fiscal factor is the effects of pandemic and recession on the budgets of school districts, cities, counties and other units of local government, many of which were already hurting because of rapidly increasing, mandatory payments into public employee retirement systems.
Those systems, especially the California Public Employees Retirement System (CalPERS) and the Californian Teachers Retirement System (CalSTRS), also are being hammered by declines in stocks and other investments and may be compelled to seek even more money from employers.
Schools and local governments will be looking to Sacramento, as they did in the Great Recession, for relief while the “nation-state of California,” as Newsom often describes it, will be looking to Uncle Sam — or Uncle Donald — to avoid a fiscal meltdown.