Legislative Analyst Offers First Hint of Impact of Coronavirus on State Budget

Legislative Analyst Offers First Hint of Impact of Coronavirus on State Budget

The coronavirus and the massive economic shutdown that has accompanied it as large parts of California are sheltering in place is significantly complicating work on the May Revise of the Gov. Newsom’s budget, due in just weeks.

California’s nonpartisan Legislative Analyst Gabriel Petek on Wednesday released his first assessment of state’s fiscal condition due to the coronavirus.  He says that it is “premature” to estimate how much the revenue estimates in the Governor’s January budget will have to be revised downward.

When assessing potential tax revenue in light of the significant decline in the stock market in recent weeks, Petek notes that “the Governor’s budget projected tax revenues from capital gains income of about $30 billion across 2019-20 and 2020-21.”

He cautions, “A preliminary analysis conducted by our office indicates a very high likelihood that tax revenues from capital gains income will be several billion dollars lower than what the Governor’s budget assumed.”

In light of this uncertainty, Petek says that, “regardless of the ultimate revenue estimates, the Legislature almost certainly will have to reassess its policy priorities for the upcoming year.”

Newsom was asked in his March 15 press conference about how California’s budget could be affected by the coronavirus.

While saying that “we’ve never been in a better position to weather a recession,” Newsom detailed that his budget planning included fiscal scenarios modeling out a mild recession that is “less severe than 08-09 but more severe than 2001.”  In that scenario, Newsom’s team projected a 3-year impact to state revenue of $70 billion, and a $40 billion impact to the General Fund.

“We think within the margin of error, our ability in the current environment, the ability to absorb that exists, even with our reserves and our capacity to move things around,” Newsom said.  Though, he cautioned that it would be a different conversation if it is a more severe recession, however additional federal support would likely on the table.

“We are better position, I think, than the vast majority of states in the country,” he concluded.

As I wrote on Right by the Bay earlier this week, California’s strong rainy day fund reserve, which was supported by Republicans and Democrats and enacted by voters in 2014, will provide some relief.  Wisely, Newsom and his predecessor Jerry Brown joined lawmakers in socking away billions of dollars during recent years of strong economic and tax revenue growth.

These dollars will now be relied upon to blunt some of the impact of the looming budget crisis. But the severity of the crisis – and the need to redirect billions of dollars of existing spending for critical, immediate needs related to the coronavirus as evidenced by this week’s vote on Senate Bill 89 appropriating $500 million in initial, urgency spending and authorizing up to $1 billion more if needed in the emergency – mean that all that we’ve saved surely won’t be nearly enough to prevent significant budget disruption, especially if the economic downturn is lengthy and severe.

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.