California Budget ChallengeAbout Next 10Budget Overview

Budget Basics

The Current Situation

Governor Newsom released his proposed budget on January 10, 2020. The current economic expansion that began in 2009 following the Great Recession is the longest the U.S. has experienced since WWII. Economic growth is assumed to continue at a slowing pace through 2023-24. Risks that might affect national and state growth include trade disputes, market volatility, and a global economic slowdown, among others. The global outbreak of COVID-19 in early 2020 has had an enormous impact on the eventual 2020-21 state budget—with a forecasted deficit of $40.9 billion absent other changes as a result of increased costs (both direct and indirect) and substantially lower revenues. The combined deficit for the remainder of 2019-20 and 2020-21 is projected to be $54.3 billion. 

The main sources of General Fund revenue for the fiscal year 2020-21 have been revised downward from the January proposed budget by the following amounts:

  • Personal income taxes: $26.3 billion due to a decline in all income sources, but particularly wages, proprietorship income, and capital gains
  • Sales tax receipts: $7.7 billion due mainly to lower consumption and investment by businesses
  • Corporation taxes: $3.64 billion based on a significant drop in corporate profits

Unemployment: Prior to the pandemic, the unemployment rate in California was at a historic low of 3.5%—about one-third the Great Recession peak of 12.3%. Now, the 2020 unemployment rate in California is projected to be 18%, and more than 4.4 million people have filed unemployment claims from mid-March to May 9th. The state is expecting to pay out $43.8 billion in unemployment benefits in 2020—a 650% increase over the $5.8 billion projected in January prior to the pandemic and recession.

Personal Income: State median income did not return to the pre-Recession level until 2018, and now personal income is projected to decline by 9% in 1010. Personal income is expected to return to the 2019 level of $2.6 trillion in 2023, which is $470 billion or 15% below the 2023 amount projected in the January budget.

Reserves: While the state is currently in a better fiscal position than during the Great Recession with significant reserves, the scale and scope of the budget problem are greater than our existing reserves. At the beginning of 2020, the state had approximately $17 billion in reserves, and these are expected to be drawn down over the next two years. State law only allows half of the reserve balances to be used in any given year for the Budget Stabilization Account (BSA) and Safety Net Reserve, so the state anticipates using $7.8 billion from the BSA (also called Rainy Day Fund) and $450 million from the Safety Net Reserve (used for Medi-Cal and CalWORKs). The state proposes to draw down the entire balance of the Public School System Savings Account (PSSSA) of $377 million to offset reductions in funding to K-12 schools. and Given the economic outlook, the state is relatively good fiscal health with sufficient reserves to weather a mild recession over the coming years.

Federal Uncertainty: Lastly, uncertainty at the federal level could impact California's budget outlook, particularly in light of the economic downturn. The state ($9.5 billion) and local governments (cities and counties with populations greater than 500,000; $5.8 billion) have already received $15.3 billion through the Coronavirus Relief Fund, K-12 schools received $2 billion, and the state’s higher education institutions have received $1.7 billion. An additional $50 billion in federal funding is anticipated to augment the state’s unemployment benefits (paid through the state directly to individuals) as a result of the additional $600/week on top of the regular state benefits, with another $1 billion for food and nutrition programs. While the amount of aid the state has received so far through the Coronavirus Relief Fund is substantial, the severity of the budget problem leads the May Revision to include another $14 billion in “trigger cuts” (cuts triggered if additional federal funding is not made available) across various programs by the start of the fiscal year on July 1st.

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