SACRAMENTO — California faces a $54.3 billion deficit as the coronavirus pandemic hammers the economy, the state’s worst budget gap since the Great Recession, state finance officials said Thursday.
The shortfall is almost 37 percent of the current $147.8 billion general fund budget and foretells widespread program cuts absent a federal bailout. K-12 schools and community colleges stand to lose $18 billion alone and are clamoring for money to adapt campuses to a new social distancing reality.
The Department of Finance released its projections in a rare fiscal update a week before Gov. Gavin Newsom is expected to roll out his May budget revision, his first post-coronavirus spending plan. The deficit projection extends to the remainder of this fiscal year and through the 2020-21 period that starts July 1.
Newsom said Wednesday that he expects a prolonged economic downturn. The Finance document suggests that income losses will be far deeper than during the Great Recession more than a decade ago.
“It’s going to take longer than I think a lot of people think,” Newsom said.
“We’ve never experienced anything like this in our lifetime,” he said, adding that the national unemployment rate will soar to “Depression-era numbers.”
The bulk of the deficit comes from a projected $41.2 billion revenue decline over the next 14 months, a drop from the ebullient outlook the state had just four months earlier, according to the Department of Finance. Forecasters believe the state’s big three tax sources — personal income, sales and corporations — will plunge about 25 percent.
As usually happens in a recession, the state will likely see soaring demand for health and human services programs, adding $7.1 billion in costs, the Finance Department said. California can expect to spend $6 billion on other new expenditures, most related to the coronavirus response.
The numbers are staggering, but they can be viewed with a grain of salt. No fiscal forecaster has a confident handle on how the next year — let alone the next several years — will play out, because so much depends on how Covid-19 affects economic activity. The virus is unpredictable, as are the health care and government responses.
While Newsom sees a long downturn, some economists believe a V-shaped rebound is possible after a painful year.
California budget experts say it is likely the Legislature will have to build in contingencies, such as trigger cuts, in case the revenue decline worsens. The Legislature might have to rewrite the budget at least once in the fiscal year, as happened in 2008-09 during the last recession.
The new forecast marks a stark reversal for a state that had been riding high on surpluses and growing reserves in recent years, building confidence before Covid-19 that California might have recession-proofed itself.
The state can count on roughly $16 billion in savings to buffer the deficit impacts — much more than other states — but the budget gap is still nearly three-and-a-half times the size of that rainy day stockpile, Finance points out.
The $54.3 billion estimate is far higher than the roughly $35 billion figure that Legislative Analyst Gabriel Petek presented to lawmakers in April. Still, the new projection nominally falls below the roughly $60 billion gap the state dealt with in 2009 in two separate budget actions. And as a percentage of the state general fund, the new deficit is still smaller than the state faced that year.
If the forecast holds, state leaders would face difficult choices, as their predecessors did more than a decade ago. The state survived the Great Recession by cutting nearly every program and adopting accounting tricks such as delaying state worker pay by a day.
The state also borrowed heavily from accounts outside the general fund, creating the so-called Wall of Debt that only recently has been eliminated several years after the fact.
The last recession prompted state worker furloughs, teacher layoffs, increased class sizes and the loss of some health and social service benefits for low-income residents. Lingering budget woes also led voters to approve tax hikes on top-income earners and sales. The electorate in 2016 overwhelmingly agreed to extend the income tax portion through 2030.
The state is better prepared this time, between the rainy day reserves and replenishment of accounts that could again be borrowed against. California also has a better cash cushion.
When the last recession struck, legislative leaders locked members in the Capitol because the parties could not agree on a solution.
Democrats now wield significantly more control, with a supermajority in both houses. And in 2009, Republican Arnold Schwarzenegger was in the governor’s office, not Newsom, a Democrat.
Thursday’s fiscal report includes a staggering estimate for the state’s unemployment rate: 18 percent, far higher than the 12 percent the state saw during the Great Recession.
California residents have filed more than 4.2 million unemployment claims since the pandemic took hold in the state.