California Facing Landmark $54.3 Billion Budget Deficit Due To COVID-19 Crisis

Updated 3:23 p.m.

California is projecting a $54.3 billion deficit — a landmark shortfall due to the COVID-19 crisis that will reverberate through state budgets for years to come.

"This is, unfortunately, not going to be a one and done,” state deputy director of finance H.D. Palmer told CapRadio. “It’s going to take a long time.”

The forecast, released by the state Department of Finance on Thursday morning, will be reflected in Gov. Gavin Newsom’s “May Revise” budget scheduled to come out next week. 

Revenue projections are dire: a $9.7 billion drop for this year’s budget, and a $32.2 billion projected decline for the 2020-21 fiscal year.

Before the pandemic, California began the year with a $5.6 billion surplus and a projected $21 billion in its “rainy day” fund, reserves that will be wiped-out by the current deficit.

At his daily news conference on Thursday, Gov. Gavin Newsom said he’s confident the state will “get through this,” before adding that “more federal support” is crucial.

“Because of this pandemic, because of what it has done, these revenue shortfalls are bigger than even the state of California,” Newsom added. “We need the federal government to recognize this.”

While the projected budget deficit is modestly less than what the state faced in 2009, it will be more difficult to navigate, according to Palmer. During the Great Recession — which was sparked by a subprime mortgage crisis and collapse of the stock market — people still ate out at restaurants, visited Disneyland and spent money across other sectors, Palmer explained.

“That’s not what’s going on right now. We’ve had wholesale shutdowns of California’s economy that we’ve never seen before,” he said.

In its fiscal update, the Department of Finance says the state’s lower-income residents will bear the brunt of the crisis: “... the impact of these economic losses will be disproportionately borne by low- and middle-income Californians. This is particularly concerning as state median income did not return to the pre-Great Recession level until 2018.”

The 2020 forecast for total wages and salaries is projecting a decline four-times greater than during the Great Recession, and the state anticipates a decline in personal income tax by 25%.

Without federal help, budget experts say California will need to consider major cuts to areas such as K-12 schools and funding for county governments, which rely heavily on state dollars for health programs. 

“The key variable is the federal relief,” said Chris Hoene, executive director of the California Budget and Policy Center, which provides independent analysis and advocates for Californians with middle and low incomes. 

Hoene said those most affected by the cuts would be people of color, low-income residents and undocumented Californians, many of whom are already suffering as a result of the pandemic. 

Compared with the Great Recession, California is in a stronger position to weather the financial challenges of this recession, said Jeff Michael, director of the Center for Business and Policy Research at the University of the Pacific in Stockton.  

The state’s reserve funds are much larger than in the past and it is less reliant on sales tax revenue. 

But Michael said he still expects “significant budget cuts across the board.” 

Assembly Budget Chairman Phil Ting said the current fiscal year’s budget should remain largely intact because the Federal Emergency Management Agency has agreed to reimburse California for many of its COVID-19-related expenses. 

That won’t necessarily be the case in future budgets, he said. 

“It’s devastating,” Ting told reporters on a conference call on Thursday, speaking of the potential spending cuts. “At the time people need government the most, it’s also a time we have limited ability to help.”

Ting says the state should consider extending state unemployment benefits into the fall, beyond the length of time the federal government has promised to help. He said that move would “keep people afloat” in the short-term rather than driving them into poverty.

To ensure greater oversight, Ting said he’s urged the Newsom administration “to stop spending money in an ad hoc way” and to give the Legislature a spending plan.

The governor is still finalizing his May revision budget, according to Palmer. It’s due a week from Thursday.

“By definition these are going to be extremely difficult decisions to put on the table,” Palmer said. “We’ve got a lot of difficult decisions that need to be made in a short amount of time.”

California’s constitutional deadline to pass a budget is June 15.

The Department of Finance report suggests that federal stimulus money will be necessary for this budget crisis. 

That was echoed by Newsom, who in a letter to Speaker of the House Nancy Pelosi on April 8 requested Congress to appropriate $1 trillion to state and local governments for COVID-19 fiscal relief.

CapRadio's Chris Nichols contributed to this story.