‘Beyond Crazy’: Coronavirus turns California’s $20 billion budget reserves into red ink

California lawmakers are cautiously optimistic they can avoid slashing tens of billions of dollars in spending from government services this year despite the economic hit of the coronavirus outbreak, but a prolonged recession could consume the state’s historic reserves and force deep cuts to programs.

The state’s economy has slowed to a near standstill since Gov. Gavin Newsom issued an indefinite stay-at-home order on March 19, ending nearly overnight the expansion California had enjoyed over the the last decade.

“It’s been a really good, 10-year run,” said Assembly Budget Chair Phil Ting, D-San Francisco. “What we didn’t anticipate, and obviously given the size of the pandemic, was how it doesn’t just affect a piece of California, but every part of California and everyone in the country.”

That run reached its peak in January, when Newsom proposed a $222 billion state budget that projected economic growth for at least a couple of more years.

Unlike the last recession, California is heading into the downturn with significant reserves. California’s stash includes $17.5 billion in reserves in February, according to a recent Legislative Analyst’s Office report.

How that safety net will protect Californians from the long-term economic havoc, however, is an open question.

It also might not buy much time.

What could happen?

Independent budget analysts at the Public Policy Institute of California and the Legislative Analyst’s Office in the past two years published reports suggesting California had almost enough funds to weather a mild recession without significant spending cuts.

In the mild scenario, California would lose about $5 billion a year over two years, and total revenue would come in about $46 billion below what the state could expect to collect in a growing economy, according to a November 2018 report by the Legislative Analyst’s Office.

In a severe recession, California’s revenue would plummet by $173 billion to $185 billion over five years, eating through reserves and forcing significant spending cuts, according to a May 2019 report by the Public Policy Institute of California.

So far, the coronavirus downturn has the makings of a severe recession, say some lawmakers.

“Everything I worried about happening has just happened,” said Sen. John Moorlach R-Costa Mesa. “Maybe even worse than I anticipated it would.”

“It’s like someone took a Monopoly game board and in the middle of the game, took the board and threw it,” said Moorlach, who in the 1990s worked on Orange County’s bankruptcy reorganization as the county’s treasurer.

In the last month alone, 2.5 million Californians have filed for unemployment. Newsom has asked House Speaker Nancy Pelosi for $1 trillion to help states and local governments during the pandemic, and discarded his initial January billion budget proposal as “inoperable.”

The governor’s initial blueprint considered a modest recession that Department of Finance spokesman H.D. Palmer said projected an economic retraction somewhere between the “Dot-com bust” of 2000-2001 and the Great Recession of a decade ago.

Each day of the pandemic, Palmer said, pushes California closer to the 2009 model.

“Things are not looking swell,” he said. “Clearly there are severe and ongoing economic consequences of the coronavirus pandemic from not only the public health aspect of it, but the economic effects of it worldwide.”

Delayed tax deadline

Senate Majority Leader Bob Hertzberg, D-Van Nuys, said the coronavirus is unlike anything he’s worked through as a legislator, including his tenure as Assembly speaker during the 2000 energy crisis that landed California with a $42 billion electricity bill.

“It’s beyond crazy how big this is,” Hertzberg said.

It’s hard to compare the coronavirus downturn to the 2009 recession, when the state faced a $60 billion deficit and endured a months-long budget impasse before lawmakers and former Gov. Arnold Schwarzenegger finally made a deal. To close the gap, lawmakers from both parties agreed that the $119 billion 2009-2010 budget would have to include severe cuts to services, tax increases and borrowing.

For COVID-19, it’s a guessing game as to how long restaurants and businesses stay closed and people remain unemployed. But the longer the shutdown continues, the deeper the economic crisis becomes and the more “we don’t know what the future holds,” Ting said.

Newsom extended the state’s tax filing deadline to July 15, meaning lawmakers will have to wait several more months for a clear picture of revenue.

Ting said the Legislature could pass a baseline budget by the state’s June deadline that extends current spending levels. Then in August, when some of the dust settles, the Legislature can decide whether to add money or slash expenses.

Ting said that could mean moving from “a budget where we were adding things and increasing spending on key priorities,” to one that “we would have to cut back on these priorities.”

Hertzberg takes heart in the reserves California accumulated through spending reforms adopted by former Govs. Schwarzenegger and Jerry Brown.

“Thank God we did that,” Hertzberg said.

Passing a budget in a hurry

Lawmakers are not scheduled to return until at least May 4, and will quickly face legislative deadlines and have to pass a budget. Democratic leaders have asked members to shave the number of bill proposals and consider how much their ideas could cost.

The emphasis this year will be on COVID-19 cleanup legislation, wildfires and the state’s growing homelessness crisis, said Assemblywoman Lorena Gonzalez, a San Diego Democrat and chair of the Appropriations Committee. Everything else faces the chopping block.

“It’s tough to be in a position where we know there’s not a lot of extra money. And I’ve heard a ton of stories, from previous Appropriations chairs that served in fiscal times that were tougher, how mean of a job it was,” Gonzalez said. “We’ll experience this year and next year, some belt tightening.”

The budget approval process also will be streamlined. Normally, Senate and Assembly subcommittees hold weeks of hearings on spending proposals before passing a budget in June.

This spring, many of those meetings are expected to be swapped for bipartisan oversight hearings of how Newsom’s administration is spending the $1.1 billion in COVID-19 emergency funds the Legislature unanimously authorized in mid-March.

“Managing the COVID-19 crisis has brought unprecedented change into all of our lives and in the way we are conducting the people’s work here in California,” said Senate President Pro Tem Toni Atkins, D-San Diego. “Everyone in this state, from families to our courageous medical professionals, has had to adjust, and so will our government.”

This story was originally published April 15, 2020 at 5:00 AM with the headline "‘Beyond Crazy’: Coronavirus turns California’s $20 billion budget reserves into red ink."