California enters the hopeful, rebuilding phase
After entering 2020 with a $6 billion surplus, and working its way through several harrowing months, California is now in the hopeful phase, said Scott Wu, executive director of the California Infrastructure and Development Bank.
“In some ways, the California story of 2020 resembles that of the rest of the country,” said Wu, a speaker on an online panel Tuesday at the Bond Buyer’s annual California Public Finance conference, as he walked everyone through what he described as the phases of 2020.
His description included the pre-pandemic sunshine phase, the May/June phase of social unrest, the survival phase of the summer months, and then the meltdown phase as the state battled more than a dozen wildfires.
During the sunshine phase, the state had aspirations of using that $6 billion surplus to increase spending to bolster healthcare and deal with climate change as well as tackling social issues such as homelessness, and instead ended up dealing with the economic shock wrought by the pandemic, the social unrest that followed the Minneapolis police killing of George Floyd, and devastating fires, Wu said.
In May, Gov. Gavin Newsom released a revised budget plan that included a $54 billion deficit.
Now in October, the state is in the hopeful-rebuilding phase, Wu said.
“The state was more prepared than it could have been,” said panelist Matt Butler, a Moody’s Investors Service analyst. “Putting the budget reserves aside, the liquidity across all funds was really strong. The state is planning to spend the reserves down, but it’s good that it is in the position to do that.”
As of right now, the state is in a good position, Butler said.
“It did rely on deferring some costs, but it is performing well from a revenue standpoint,” Butler said. “That is a good sign.”
State lawmakers have been contemplating a variety of legislation that could increase taxes in the state.
The Nov. 3 ballot will also ask voters to weigh Proposition 15, which would exclude commercial properties worth more than $3 million from the voter-approved 1978 measure that limits property tax assessments from rising more than 1% annually unless the property is sold.
The state’s most recent cash report came in higher than what was forecast when the budget was approved in July, but given current economic conditions, the state may need to turn to tax increases, according to panelists.
“I think there will have to be some form of higher taxes,” said John Gresham, managing director and municipal analyst with Hilltop Securities. “I have no opinion as to what form those taxes might take. And everything is in flux, because we don’t know what kind of relief might be coming [from the federal government]."
The IBank is looking at refunding all of its bonds, given the prevailing low interest rates, to free up more money to support its programs, Wu said.
On Wednesday, the IBank board planned to discuss doing taxable advance refundings to lock in rates and provide more flexibility to do workouts, Wu said.
California has $11 billion in deferred expenses, most of which involves the state’s K-12 school districts. Lawmakers had been hoping federal stimulus would come by Oct. 15, but that didn’t happen, said moderator Richard Simon, an Assured Guaranty director.
“The state is a key player with the schools,” Butler said. “There is some question about whether the federal aid won’t be forthcoming, which could push the deferrals in fiscal 2022.”
There is no question the state and schools will need to work closely, Butler said.
“The state has offered some relief to schools, suspending the statutory requirement to increase pension obligations,” Butler said. “It does carry some challenges for the state. There is a question whether it will carry the costs for school districts, possibly into the next three or four years.”