California Legislature facing $54.3-billion deficit chooses to increase spending

The California Legislature, facing a $54.3 billion budget deficit in the next fiscal year beginning July 1, has chosen to increase spending in expectation of a federal bailout.

The nonpartisan Legislative Analyst Office (LAO) on May 7 shocked California's Democrat leadership, which holds veto-proof control of state finances, that despite federal disaster funding of $26.625 billion from the CARES Act and a $10-billion loan to pay for unemployment claims, the state faced an $85-billion deficit over the next 14 months.

As a result of the COVID-19 coronavirus lockdown, California has suffered a huge economic decline with unemployment rising to 15.5 percent and tax revenue plunging.  The impact is so severe that the County of Los Angeles is forecasting sales tax collection for the current year ending on June 30 will decline by $2 billion, or 34 percent.

The state's Department of Finance has been predicting a sharp economic recovery as the pandemic recedes.  But with the June 17 reported surge of 4,165 new coronavirus cases, mostly in urban areas, Gov. Gavin Newsom issued a statewide executive order requiring that face masks be worn in all public places.

According to the state controller's cash report through May 30, California has suffered a $21-billion shortfall in tax receipts versus spending for the first 11 months of the current budget year.  The state had already borrowed $15 billion to continue spending.

With California's constitution requiring the enactment of a balanced budget before the July 1 start of the new fiscal year, Gov. Newsom proposed a 10-percent across-the-board slash in program spending and all state worker salaries to the state Legislature.

Despite the mushrooming financial crisis, the Legislature just passed a budget that cuts spending by $402 million for universities but then raises state spending by $400 million for counties, $350 million for homeless services, and $65 million for higher Earned Income Tax Credits for low-income workers.

The legislature claims that the budget is balanced based on the expectation that Congress will pass House Speaker Nancy Pelosi's proposed $3 trillion federal bailout to fund the entire $85-billion deficit and allow another $1.7 billion in social spending.

If the federal bailout fails to materialize by October 1, the Legislature's budget would have a trigger that would rely mostly on funding deferrals, including a $9-billion delay for K–12 public schools and a $2.4-billion delay for state employee pension contributions.

Moody's Credit Ratings Agency's update highlights that the economic magnitude COVID-19 impact on the solvency for state and local governments will hinge on their economic diversity, revenue mix, and the willingness to quickly make spending cuts.  

Moody's stated that all 389 metropolitan statistical areas in the United States saw a year-over-year drop in April and May jobs and sales tax collection.  Monthly sales and income taxes are expected to fall by up to 40 percent through mid-2020 before a slow recovery.  Given the up to one-year delay before income and property tax payments are due, Moody's expects the worst financial difficulty for state and local finances will not begin hitting until the first half of 2021.

Gov. Newsom has the power to sign or veto whatever budget the Legislature sends him.  But with less than two weeks before the constitutional deadline and the number of California coronavirus cases on the rise, delays in cutting spending are increasing the risk of the State of California suffering a financial disaster.

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