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Coronavirus crisis could trigger huge California deficits, lawmakers are told

State Sens. Jim Nielsen (R-Gerber) and Holly Mitchell (D-Los Angeles)
State Sens. Jim Nielsen (R-Gerber) and Holly Mitchell (D-Los Angeles), members of the Senate Budget Committee, sit six feet apart during a hearing at the state Capitol on Thursday.
(Rich Pedroncelli / Associated Press)

Almost one month after Californians were told to stay home to slow the spread of the novel coronavirus, state lawmakers were told Thursday to prepare for a shortfall in tax revenues of historic proportions, a fiscal crisis that would far exceed government cash reserves.

Legislative Analyst Gabriel Petek told members of the state Senate’s budget committee to prepare for a projected deficit of as much as $35 billion in the near future and an additional $85 billion in the fiscal years to come — on par, he said, with California’s budget problems during the Great Recession.

“I do think that the Legislature should prepare for a fairly substantial downward revision,” Petek said.

Lawmakers convened their first public hearing on the coronavirus crisis on Thursday, at which only two senators, wearing protective masks over their mouths, participated in person at the state Capitol. The remainder of the senators were connected by videoconferencing, and public access to the hearing room was limited. Members of the committee took no actions, instead taking stock of the road ahead as seen by their own analysts and budget advisors to Gov. Gavin Newsom.

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“We understand the gravity of the situation,” said Sen. Holly Mitchell (D-Los Angeles), chairwoman of the Senate Budget Committee. “We all must recognize that we are embarking on difficult fiscal times.”

The early indicators, lawmakers were told, are worrisome. California’s Franchise Tax Board, which collects personal income tax revenues, reports only a trickle of cash payments in April compared with years past. In part, that’s because taxpayers have been given an extra 90 days to file and pay what’s owed from last year. Last week, Newsom’s budget director estimated this could result in significantly less short-term cash to pay for government services — as well as a delayed reckoning of the total budget shortfall.

Expenses are also likely to rise. Programs including Medi-Cal and CalWorks, the state’s healthcare and welfare programs, are open to California residents who qualify based on their income. As wages fall or disappear, more Californians will become eligible. Newsom has also announced a $125-million relief program for those in the U.S. illegally, with the majority of funding provided by state taxpayers.

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“This is both a public health crisis and an economic crisis, which of course makes it a key budget issue,” Vivek Viswanathan, chief deputy director of the California Department of Finance, told lawmakers.

So far, Newsom has notified lawmakers of $7 billion in emergency state spending needed to respond to the pandemic. But details have been released for only about $769 million in expenses. The governor will present lawmakers with a revised state budget plan in mid-May, which may be the earliest that additional details will be released. Several senators involved in Thursday’s hearing took issue with the Newsom administration’s refusal to hand over details of the $990-million agreement to purchase 200 million protective masks — a deal the governor touted last week on national television but the contract for which has not been shared with the Legislature. Several news organizations, including The Times, have also asked to see the contract.

“I must emphasize that’s a big deal,” Sen. Jim Nielsen (R-Gerber), vice chairman of the committee, told Viswanathan. “And many of us are going to be very insistent at seeing the terms of that contract.”

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The warning of a major budget deficit was the first of its kind in Sacramento in almost a decade. At one point during the early days of the Great Recession, the state faced a shortfall of as much as $40 billion, leading to deep cuts in education and social services that were later erased over a period of years by a recovering economy and a series of voter-approved tax increases. In January, budget analysts predicted the state would have close to $21 billion in cash reserves by next summer.

Petek, whose staff analyzes spending and taxation issues for the Legislature, said a more realistic assumption is that the reserves total about $17.5 billion — almost all of which is in the state’s “rainy day” fund that can’t be spent without specific action by the governor and lawmakers. He told senators that for now they should proceed carefully in deciding how to respond.

“We recommend a judicious use of the reserves, at least at first until we have a better sense of what the revenue picture will be,” Petek said.

On Friday, Newsom announced that he had tapped former governors, Apple Chief Executive Tim Cook, Disney Executive Chairman Bob Iger and other business executives and politicians to guide the state’s economic recovery from the coronavirus outbreak as the state unemployment rate climbed to 5.3% in March and millions of Californians seek financial support.

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The governor said his chief of staff, Ann O’Leary, and billionaire climate activist and former Democratic presidential candidate Tom Steyer would head the new Task Force on Business and Jobs Recovery and develop recommendations for the government and companies to improve the economy, create jobs and help Californians get back on their feet.

“We are now in a pandemic-induced recession in the state of California,” Newsom said. “These are sobering and challenging times.”

Times staff writer Taryn Luna contributed to this report.


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