How the coronavirus pandemic impacts the California budget

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The worst-case revenue scenario California prepared for amid the COVID-19 pandemic has not arrived, at least not yet, according to the state's legislative analyst.

Revenue receipts for the first quarter of the fiscal year came in $8.6 billion higher than anticipated when the state’s revised May budget was released, Gabriel Petek said Tuesday in an online keynote discussion at The Bond Buyer’s annual California Public Finance conference.

Gabriel Petek, California's legislative analyst, delivered a keynote address to the Bond Buyer California Public Finance conference.

That's amid an unemployment rate that the pandemic has driven to the 11% level.

Two factors that Petek noted were that the state’s progressive income tax structure is more heavily weighted toward high-wage earners, who generally have seen their careers less disrupted by the pandemic than blue-collar workers; and that the stock market was 64% higher than anticipated when the budget was approved.

“Our theory is that a lot of the job and income loss that has happened in this recession is occurring in the lower-wage area of the income distribution,” Petek said.

One of the differences between today and the state’s budget picture following the Great Recession of 2008 is that it had built up $16 billion in its budget stabilization fund ahead of the current downturn, Petek said.

That's one reason that California, which has not issued revenue anticipation notes to manage its cash flow since 2014, has not needed to bring them back despite the pandemic-induced economic shock.

The state’s Department of Finance had sent a letter to the Legislature ahead of budget talks in March saying the state’s borrowable resources had declined from $47 billion to $8 billion, but by the end of the fiscal year in July, the state still had $37 billion, Petek said.

The economic picture in the state deteriorated quickly after Gov. Gavin Newsom ordered the closure of all but essential, businesses in March. The state lost 2.6 million jobs in March and April, which is twice the 1.3 million the state lost over a 20-month period during the Great Recession, Petek said.

Because of the job losses, state fiscal analysts expected the cash status to be impacted, but Medi-Cal expenses were less than thought, and fewer people needed public assistance than anticipated, he said.

As the year has progressed, the financial analysts in the Department of Finance and the Legislative Analyst’s Office have discovered initial dire predictions around revenues have not been realized, Petek said. With income tax collections moved from April to July, the DOF and LAO didn’t have clear data in which to produce revenue forecasts, Petek said.

The sales and use tax also came in $1.6 billion above the budget forecast, he said.

“Though it’s inflicting pain to some sections of the economy, California’s tax structure is weathering this,” Petek said.

Supplemental $600-a-week unemployment benefits from the federal CARES Act made a significant impact on California residents, he said. That benefit lapsed at the end of July.

“Through the second quarter of this year, personal income in California increased by 9.7%,” Petek said. “It’s the transfer payments from unemployment.”

How the phase-out of that benefit impacts the state economy and tax revenues is not fully quantified, he said.

“That is another element we are going to be tracking,” Petek said. “The revenues in the October cash report only reflect September. It’s a little bit of a tricky thing. There comes a day where you have to lock it down and base your forecast off that date.”

The LAO’s office expects the economy could be subject to some dissipation in growth rate, but, he said, it’s difficult to quantify at this point. The LAO will release its outlook for the upcoming fiscal year on Nov. 18.

The state deferred $12 billion of payments to K-12 schools and state universities to the upcoming fiscal year.

“If the picture continues to be more positive than we thought, we are still going to have these deferrals,” Petek said.

The state also deferred payments to schools and universities in 2011, but what was different then is voters approved Proposition 30, which brought in significant revenue for schools.

“We were set up to pay those deferrals in a way that we are not now,” he said. “The economy was also in a bull market for equities and the economy was in recovery mode.”

Absent any additional federal aid, most projections by economists say the state is in for a long slog of a recovery, Petek said. “It’s safe to assume that revenue growth will not remain as strong as it’s been.”

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California Public Finance 2020 Coronavirus State budgets State of California California Income taxes