How State Budget Will Be Impacted by Coronavirus Coming More into Focus

How State Budget Will Be Impacted by Coronavirus Coming More into Focus

A clearer picture formed this week about how the coronavirus will affect the state budget, with action in Sacramento and Washington.

Director of Finance Keely Bosler sent a letter to lawmakers that the department will “reevaluate all budget changes within the context of a workload budget.”

“While our first priority is the state’s response to COVID-19,” she wrote, “we must also meet our constitutional obligations to enact a balanced budget for the coming year.”

Expect some significant spending changes, both as just mid-year adjustments to the current 2019-20 state budget, and a dramatically different” May Revise compared to what Gov. Newsom was planning for just a month ago.  And whatever budget is enacted in June may require further, significant legislative action in the 2020-21 fiscal year to account for spending needs or declining revenue.

Longtime Department of Finance spokesman H.D. Palmer told the Associated Press that, “we will review everything.”

The AP speculates that “some of Newsom’s plans aided by a projected multi-billion dollar surplus could be on hold,” including plans to create a state prescription drug label and expanding Medicaid to illegal immigrant senior citizens living in the state.  You can count on that.  But how far liberal lawmakers will go along with radically reshaping state spending priorities remains a question.  And, like what’s going on in Washington, will lawmakers wish to enact an expensive, state-level stimulus package?

The last major budget crisis in 2008-09 occurred in very different political circumstances.  A Republican governor and a two-thirds budget vote requirement that meant bipartisan compromise was a necessity.

Today, we have a majority vote budget and an activist liberal supermajority legislature.

Newsom will likely channel his inner-Jerry Brown and demand a realistic budget course.  This would mean re-prioritizing existing budget spending, and potentially cuts to popular programs with a liberal legislature.  Already, the AP notes that, “advocacy groups are digging in, preparing for much tougher funding fights.”  And some lawmakers will surely demand more social spending in a time of crisis.

Newsom cheered the state’s a significant cash infusion from Washington in his Wednesday press conference.  The “phase 3” coronavirus response legislation includes $150 billion for state and local governments.  He estimated that California would receive at least $10.5 billion from this package – including $5.5 directly to state government to pay for coronavirus-related spending.

Sacramento is hoping there’s more where that came from.  According to Politico, there is already talk of a “phase 4” bill that could include even more money for state and local governments.  And Newsom said in his press conference that he’ll be asking for more assistance in future federal relief packages, especially related to rising unemployment costs.

But cash infusions from Washington don’t absolve state policymakers of making tough budget decisions.  One lesson from the 2008-09 budget crisis is that “kicking the can down the road” comes with great risk.  Budgets enacted during much of the 2000’s largely “passed the buck.”  It ultimately took a decade-long effort to repay roughly $35 billion in budgetary debt run up in that period, which Gov. Jerry Brown famously called the “wall of debt.”

As I wrote previously, Newsom says the state budget is presently as well-prepared today to handle an economic downturn as it has ever been, with billions saved under the bipartisan rainy day fund enacted in 2014.  But a severe downturn, he says, is a “different conversation” that would include help from Washington.

Will lawmakers put a up a big fight if asked to make cuts and set aside liberal big spending?  Will Newsom hold his ground on fiscal discipline?  Will Washington provide even more cash to California later this year to make their budget planning easier?  Stay tuned.

Tim Anaya is the Pacific Research Institute’s senior director of communications and the Sacramento office.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.