California Faces $54.3 Billion Deficit Due to COVID-19

The contours of the COVID-19 pandemic's impact on California's state budget are coming into sharper focus: An updated projection estimates state general fund revenues will plunge by more than $41 billion from what was expected in January.

The state Department of Finance released the updated fiscal forecast Thursday morning.

But the projected budget deficit is even deeper after accounting for recent pandemic-related expenditures.

The $41.2 billion shortfall, combined with $7.1 billion in additional caseloads for health and safety programs and unanticipated expenditures of $6 billion mostly related to the COVID-19 response, signal an overall budget deficit of $54.3 billion.

"We are dealing with the economic and revenue fallout of an unprecedented shutdown of the state's economy that's been caused by this pandemic," Department of Finance spokesman H.D. Palmer told KQED. He cited the dramatic drop in state revenues resulting from lost personal income taxes associated with business closures and record unemployment.

"All of those things are rippling through the economy. They're going to be rippling through our state revenues," Palmer said. "And they're creating a substantial budget gap that we have to close between now and mid-June of more than $54 billion."

State finance officials project roughly a quarter of that shortfall will occur in the current fiscal year, with the rest falling on Gov. Gavin Newsom and the Legislature to deal with in upcoming negotiations over next year's budget, which starts July 1.

But California won't know the full extent of its revenue shortfall until August, after the July 15 deadline for paying income taxes, which account for two-thirds of the state's general fund revenues.

Still, officials anticipate personal income tax revenue will fall by 25.5% below January projections, with sales and use taxes down 27%, and corporate tax revenue down 22.7%.

That means required funding for education will be down $18.3 billion, a massive hit at a time when schools are struggling to deal with distance learning during the pandemic.

The "good news" — if you can call it that — is that California had a once-anticipated surplus of $5.6 billion in the 2020/21 budget, the result of nearly a decade of strong economic growth.

That, combined with the state's "rainy day fund" will soften the blow somewhat. The fund, created by voters in 2014, and prudently managed by former Gov. Jerry Brown, is now estimated to hold roughly $16 billion, which can be tapped within limits once the governor declares a fiscal emergency.

Still, those reserves will be cold comfort to those hardest hit by the downturn, who are disproportionately low- and middle-income Californians.

In his news briefing Wednesday, Newsom hinted at the magnitude of the problem, calling the numbers "jaw dropping."

The timing of the fiscal forecast is likely to prompt inquiries; it comes just hours after Newsom's administration finally released details of a $1 billion contract to buy safety masks from a Chinese electric car maker, raising serious questions about the state's COVID-19 expenditures.

Previously, Newsom said any details of his so-called "May Revise" of the state budget wouldn't be released until next Thursday. Instead, the deficit forecast was released at 9:45 p.m. Wednesday night, just a few hours after releasing details of the contract.

The imploding budget situation means Newsom will have to manage simultaneous crises, testing his ability to govern at a time when his popularity at home and national political stock had been rising as he and other governors filled a void left by the Trump administration.

And the bad news, in the way of rising unemployment and plunging revenues, is hardly over. Since shelter-in-place orders were issued in mid-March, shuttering much of the state's economy, more than 4.2 million Californians have applied for unemployment benefits. Finance Department officials estimate unemployment levels will reach 18% statewide, up from just 3.9% earlier this year. By contrast, unemployment in California reached 12.2% at the height of the Great Recession.

In light of such daunting numbers, Palmer said, California is waiting with bated breath for major federal financial assistance in the next round of relief legislation to continue providing core essential public services.

"That said, there are clearly going to have to be difficult proposals and difficult decisions that are going to go on the table," Palmer said.