State budget will take a very big hit

A bit of fiscal history is in order.

The Great Recession that hit California 13 years ago had a devastating effect on the state budget.

General fund revenues — principally personal income taxes paid by affluent Californians — dropped by about 20% and to maintain basic services, the Legislature and then-Gov. Arnold Schwarzenegger ran up deficits and covered them with borrowed money.

They shifted money from special funds, such as highway construction and maintenance, to prop up the general fund portion of the budget, and they triggered temporary cuts in state aid to schools, among other tactics.

When Jerry Brown returned to the governorship in 2011 he confronted what he called a “wall of debt” more than $30 billion high. Eventually, all of the borrowed money was repaid.

This history frames what is about to happen to the state budget because of the COVID-19 pandemic. Countless businesses have been shut down to battle the spread of the coronavirus, millions of jobs have been erased at least temporarily and countless billions of dollars have been wiped from stock market accounts and other investments.

The $222.2 billion 2020-21 budget that Gov. Gavin Newsom proposed in January, containing substantial increases in spending on education, health care and social services, has now been set aside. Newsom’s staff is working on a revised version to be unveiled in mid-May.

“The economic disruption from the pandemic is expected to result in a recession and have significant negative effects on state revenues,” Newsom’s Department of Finance said in a preliminary overview in mid-April. “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 into fiscal year 2020-21 and additional years depending on the pace of recovery of local, state and national economies.”

How bad will the “significant negative effects” be? A passage in the back pages of the budget says that a moderate recession would likely reduce general revenues by $25 billion a year. This recession isn’t moderate and could easily surpass the Great Recession in severity.

Moreover, the state is now markedly more dependent on personal income taxes than it was during the Great Recession, especially levies on the highest-income Californians whose taxable incomes are the most volatile.

The Legislature’s budget analyst, Gabriel Petek, has told lawmakers, “The state now faces a budget problem, potentially a significant one” and estimated a near-term deficit as high as $35 billion, eventually reaching $85 billion.

A $35 billion drop would be 23% of the revenue previously estimated for the 2020-21 general fund and it might be a conservative figure, given the budget’s estimate of a $25 billion impact from a moderate recession. Even so, $35 billion is twice what the state has squirreled away in its emergency reserve accounts.

State officials estimate that fighting the pandemic will cost about $7 billion, most of which will likely be reimbursed by the federal government, albeit with borrowed money. Nevertheless, the state would still see a heavy hit on non-pandemic spending — unless Congress and President Donald Trump give state and local governments substantial no-strings relief.

The revised budget that Newsom will propose this month, and the one the Legislature will enact by June 15, will be nothing more than preliminary guesses, since the fuller extent of the fiscal crisis won’t emerge until after the July 15 income tax filing deadline.

The budget will be revised more or less continuously thereafter as both the pandemic and the economy evolve. It will be bad, but until it happens we won’t know the depth of the fiscal damage.