California Budget ChallengeAbout Next 10Budget Overview

Budget Basics

The Current Situation

Governor Newsom released his proposed budget on January 10, 2021. Prior to the start of the COVID-19 pandemic, California was experiencing the longest economic expansion since WWII (began following the Great Recession in 2009). The state is not expected to return to the overall level of jobs in 2019 until 2025. While the negative consequences of the pandemic have been severe, they do not appear to have been as catastrophic from a fiscal standpoint as the 2020 Budget Act anticipated and the state has experienced a quicker rebound than expected. However, the recovery has been uneven—many low-income Californians remain out of work, while most high-income earners have largely been spared from the impacts of the pandemic.

As a result, the state is anticipating a one-time windfall of $15.5 billion in 2021-22 due to better-than-expected tax collections and lower-than-expected costs, particularly for social safety net programs like Medi-Cal and CalFresh. For example, between August and October 2020, collections from the state's three largest taxes so far in 2020-21 have been 22% ($11 billion) ahead of the assumptions in the 2020 Budget Act.

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%. Following the onset of the COVID-19 pandemic, the California unemployment rate reached a record 16.4% in April and May 2020 (the U.S. unemployment rate peaked at 14.7% in April 2020). Since March 2020, 27.1 million unemployment claims have been filed in California and the state has paid out $137 billion in total benefits (includes the state benefit and the supplemental emergency benefit). Total state unemployment benefit payments in 2019 were $5 billion. The California unemployment rate was 8.5% as of February 2021.

Personal Income: U.S. personal income increased by 10.4% year-over-year in Q2 2020 (up $1.9 trillion year-over-year) as transfers increased by a record $2.6 trillion due to stimulus checks and extended unemployment benefits. Total personal income in California is projected to grow by 4.9% in 2020 due largely to these transfers. Transfer payments are projected to have increased by 44.1% (or $165 billion) in 2020.

Federal Relief: Congress passed the $2.2 trillion CARES Act in March 2020, the largest fiscal stimulus in U.S. history. Through the end of August 2020, over 153 million stimulus payments (up to $1,200 for single tax filers + $500 per qualifying child) were made in the U.S., including 18 million payments in California. The CARES Act provided support to businesses and added $600 per week to all unemployment benefits through July 31, 2020. Congress passed a second COVID-relief bill in December 2020 that provided another round of stimulus checks (up to $600 per individual), extended unemployment benefits and provided an additional $300 per week, and billions more for economic relief for businesses. Following the inauguration of the Biden administration, Congress passed another $1.9 trillion COVID-relief bill in March 2021. It provided approximately $26 billion to the state government and $16 billion to local governments in California, plus extended unemployment benefits, housing assistance, and other economic relief measures. A full accounting of California's share of funding from the American Rescue Plan can be found here (LAO).

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