Governor: California's new deficit will take years to repair
With steep cuts needed for California to balance its budget this year, California may need to engage in interfund borrowing to get its budget to balance, Gov. Gavin Newsom said.
“We are not arguing to solve a $54.3 billion shortfall overnight,” Newsom said Thursday as he made his "May Revise" budget proposal. “We are not just looking at this year, and next, but at a multi-year strategy to work through this.”
California, which after taking early social distancing measures has suffered less from COVID-19 than many other states, will take a huge fiscal hit from those measures.
Newsom pointed to recent rating upgrades to underscore statements that the state came into the pandemic in good shape and to highlight that California has the ability to borrow at better interest rates than it could have in the early years of the Great Recession, when the state was being compared, by sloppy analysts anyway, to Greece.
Fitch Ratings upgraded the state in August to AA from AA-minus. Moody’s Investors Service followed in October, upgrading California general obligation bonds to Aa2 from Aa3. The state holds AA-minus ratings from S&P Global Ratings.
The state’s ratings had fallen as low as triple-B in the wake of budget crises in 2003 and following the 2008 recession.
The state had eliminated the last of the “wall of debt” as former Gov. Jerry Brown described the borrowing and budget maneuvers used to deal with previous shortfalls, with a final $4.5 billion payment last year, Newsom said.
Newsom recalled saying in early 2019 that he hoped to never have to engage in inter-fund borrowing.
“When I said that, I didn’t realize I might have to employ that tactic a year later,” Newsom said.
The revised budget proposal totals $203.3 billion and includes $133.9 billion in general fund spending, $63.4 billion in special fund and $6 billion in bond fund. The original budget Newsom introduced in January totaled $222.2 billion.
The shortfall results from a 22.3% decline in the thee major revenue sources — personal income tax, sales tax and corporate taxes since March to the general fund, with many businesses closed or scaled back in response to the pandemic.
"Not surprisingly, sales tax has taken the biggest hit," Newsom said.
The $54.3 billion shortfall is split between this fiscal year and fiscal 2021, which begins July 1.
Newsom said it's not the largest deficit the state has experienced, because there was a $60 billion shortfall in 2009. The governor proposed to close the gap with efforts over several years.
"We need to be strategic," Newsom said. "There is no printing press in California. We are constitutionally obligated to balance the budget. It's a responsibility to submit and approve a balanced budget by July 1 of this year."
He is already taking heat from some corners for proposing a budget that includes triggers that could restore items like the proposed 10% cut to the salaries of all state workers if Congress approves and President Trump signs the HEROES Act, proposed by House Speaker Nancy Pelosi to provide aid to states and cities.
"There is a lot missing from Gov. Newsom's May revision," said Sen. John Moorlach, R-Costa Mesa, who has served on the Senate Committee on Budget and Fiscal Review since he was elected in 2015. His Republican party has only 11 members in the 40-seat Senate, and is similarly outnumbered in the Assembly.
“It is missing real program and staffing cuts for contraction, except for 'trigger cuts' pending a hope of additional federal funding, to subsidize state misspending."
Moorlach said Newsom is relying too much on borrowing and deferrals.
"Opening the economy is the real answer," Moorlach said. "Keeping it closed has caused this malaise. Businesses generate tax revenues. Opening California is the right direction to go in addressing this budget crisis. The sooner, the better."
COVID-19 has killed more than 3,000 people in California; the per-capita rate of 77 deaths per one million people, according to the Covid Tracking Project, is much lower than in many other states.
So far, state officials have been reluctant to share in any depth just how the state may deploy its ability and capacity to issue long-term debt.
It can't simply issue deficit financing bonds. Gov. Gray Davis's attempts to issue such deficit bonds were stalled in court until his recall in 2003; successor Arnold Schwarzengger subsequently went to voters to gain approval for $15 billion of deficit bonds.
Over the past decade, the state’s refundings for interest rate savings have exceeded its new money general obligation sales nearly every year. The state sold more than $3.5 billion of GO bonds this spring. It typically waits until the fall before issuing more GOs.
“We are in a much better position then we were in 2003, or 2009, or in more contemporary times of 2011,” Newsom said. “While the numbers have changed, we are committed to maintaining our values.”
The governor said his focus is on public education, public health, public safety and people hit hardest by COVID-19.
The budget looks at multi-year risks to the state, national and global economy, Newsom said, including prolonged disruption from the pandemic and public health response. The budget plan highlights climate change, housing affordability, an aging population, lower fertility rates, and slowing migration as key risks to the California economy.
The May Revision proposes to tap the $16.2 billion rainy day fund over a three-year period. It will also use a $900 million safety net fund created by Sen. Holly Mitchell, D-Los Angeles.
The League of California Cities said the budget doesn’t appear to take money from cities to balance the budget.
“We appreciate the Governor’s proposed allocation of $450 million of the state’s CARES Act funding to help cities address the increases in expenses due to COVID-19 and are eager to learn more details about how cities would access this funding,” Carolyn Coleman, the league’s executive director, said in a statement. “All California cities, big and small, are experiencing severe budget impacts from this pandemic, and it’s important that they all have direct access to this funding."
Newsom added that he is still committed to helping the people of the state who most need helping while maintaining the fiscally conservative principles that Brown and lawmakers adhered to in the years following the recession to restore the state’s bond ratings.
"Nothing breaks my heart more than making budget cuts," Newsom said. "One thing I know is there is a human being behind every number."
“The economic consequences of COVID-19 are not only being felt statistically, but we have not felt anything like this since the Great Depression,” Newsom said. “This is simply without precedence in modern times.”