[guest post by JVW]
UPDATE: Stupid me; I should have linked the proposed budget document which kinds of lays everything out. Here it is.
We of course have seen this coming ever since the COVID-19 shutdowns began, but now the California Legislature and Governor Newsom are beginning the difficult process of cobbling together a budget for the 2020-21 fiscal year. It involves a wing and a prayer:
How does a liberal, blue-state governor take on the unappealing task of slashing the budget? By shifting a lot of the pressure to the federal government.
In revising California’s budget down to $203 billion today, Gov. Gavin Newsom charted a plan to fill a huge deficit by tying many cuts to additional federal aid. If the feds come through with $1 trillion for state and local governments that Newsom and other Democratic governors have requested, California would not reduce funding to schools, colleges, parks, child care, health care and other programs.
“The President of the United States, with a stroke of the pen, could provide support for Nancy Pelosi’s new Heroes Act and these cuts could be eliminated,” Newsom said, as he presented his proposal to close a $54 billion deficit brought on by record job losses during the coronavirus pandemic.
It’s a strategic, if risky, course as Newsom heads into a sprint of budget negotiations with state lawmakers over the next four weeks.
The state needs to have the federal commitment by July 1 when the new budget goes into effect, but given the partisan division that currently exists in Washington it might be a stretch to expect resolution in six weeks. So the state is exploring a number of scenarios, from the idealized framework of full support coming from Washington down to the disastrous one in which no federal aid is forthcoming. Taking those two as best-case and worst-case, the outline starts to emerge.
In the absolute best-case scenario Congress and the White House would cough up enough money so that the Sacramento gravy trail could continue, but given the reluctance of House Democrats in swing districts to sign on to Aunt Nancy Pelosi’s $3 trillion (yep, that’s trillion with a “t”) plan as well as Cocaine Mitch McConnell’s outright dismissal of progressive fantasies, states are inexorably going to tighten their belts. The hopes of the Democrat establishment in Sacramento are therefore limited to receiving a roughly $14 billion wet kiss from Uncle Sucker to plug budgetary holes. In return, California would:
* rescind approximately $6.1 billion in recent increases, including an expansion of MediCal services to immigrant families and the elderly
* forego a planned $2.4 billion supplementary contribution to public retirement accounts, which won’t sit well with the state actuaries or unions
* transfer $8.8 billion from the state’s rainy day fund, with the possibility of withdrawing an additional $7.5 billion over the following two budget years while we wait for what might be a fairly long recovery
* cap tax credits used by businesses and wealthy taxpayers, including those used for net operating losses, which would allegedly save $4.4 billion, providing those taxpayers don’t flee the state
* shuffle $4.1 billion from account to account and change payment dates, and rig up another $6.3 billion in unspecified borrowing and payment deferrals.
Those — ahem, ahem — “savings” coupled with $8.3 billion granted to the state in the second phase of the America Cares act would on paper at least cover the full deficit, provided that the feds kick in the $14 billion that the state desires. Should that funding not be forthcoming, the state is looking at 10% spending reductions in K-12 and higher education, elimination of state-funded optional Medi-Cal benefit and dental coverage, and a 10% pay-cut for state employees or else similar measures negotiated with the union in order to reach the same payroll reduction target (i.e. layoffs or furloughs). Already flushed into the memory hole are Gov. Newsom’s earlier plans to extend health insurance to illegal immigrant residents over the age of 65 and subsidize daycare for children of working parents. Among the spending initiatives from the first Newsom budget that is likely to be pared back is the money dedicated to building new subsidized housing for middle-class families and the homeless.
Even if the state manages to wrangle the full $14 billion in additional funding from politicians who find expedience in election year largesse, projections are that this economic slowdown will have implications on the budget that will likely last for at least two more years. So at right around this time next year the state will be either going hat-in-hand back to Washington (with a possible second Trump Administration who may tell them to go pound sand) or making additional cuts and raising revenue. The big wildcards will be whether or not the ruling party can convince Californians to raise property taxes on businesses this fall and whether the legislature will also entertain an attempt to raise income and sales taxes just as Jerry Brown did eight years ago.
But it’s bound to get ugly as we march on towards the budget deadline.