SACRAMENTO — A quicker economic rebound than anticipated has softened California’s budget woes and will bring the state an estimated $26 billion windfall by the next fiscal year, the Legislative Analyst’s Office reported Wednesday.
But the one-time cushion is not enough to offset the severe financial losses of the coronavirus pandemic. The nonpartisan legislative analyst’s fiscal outlook warned that a projected multibillion-dollar operating deficit would more than triple over the next four years as rising costs outstrip the growth in tax revenue.
By 2024-25, California will face a budget gap of about $17.5 billion. Legislative Analyst Gabriel Petek said policymakers should start considering solutions to the problem, which may require either spending cuts or new taxes, while there is time.
“We think the Legislature should begin developing a plan and thinking about ways to implement fiscal adjustments that would help bring the state’s fiscal structure back into alignment,” he told reporters during a call.
After a shutdown brought on by the pandemic earlier this year led to widespread layoffs and a sharp drop in consumer spending, lawmakers worked to close a $54.3 billion budget deficit this summer using reserve accounts, internal borrowing, federal aid and temporary corporate tax increases, which allowed the state to avoid reductions in health and safety net programs.
Expectations of plunging tax revenues were overly pessimistic, Petek said. Wealthy households that provide a large amount of state revenue through personal income taxes have experienced a strong economic recovery, thanks primarily to a stock market that has hit record highs. Between August and October, state tax collections came in $11 billion, or 22%, ahead of budget projections.
Lower-than-anticipated enrollment in Medi-Cal, the state’s health insurance program for the poor, and other welfare programs has also eased the strain on the budget.
Gov. Gavin Newsom is due to release his 2021-22 budget proposal in less than two months. In a statement, the state Department of Finance attempted to lower expectations for what the state might do with its “welcome but short-term revenue surge,” agreeing with Petek that California’s financial picture is going to get worse.
“While the budget is better off than we had feared several months ago, deficits are still on the horizon and better-than-expected revenues haven’t translated into an economy that’s fully rebounding,” said H.D. Palmer, a spokesperson for the department.
Because of the tremendous economic uncertainty as the coronavirus surges again across the country this fall, the Legislative Analyst’s Office estimates that the state’s windfall could ultimately range from $12 billion to $40 billion.
But that one-time surplus — forecast to be $26 billion — will provide only a temporary reprieve. Sluggish revenue growth is expected for the next several years, the analyst’s report said, while costs are projected to rise significantly for Medi-Cal, prisons and supplemental payments to school districts that were devised this year when the state believed education funding would drop.
Petek stressed that California cannot afford new spending and recommended lawmakers set aside half the money to rebuild its reserve accounts and use the rest for programs to ease the economic and health effects of the pandemic.
Senate President Pro Tem Toni Atkins, D-San Diego, said her priorities would include restoring cuts made this year to universities, the court system, state worker pay and other programs, as well as assisting local governments suffering from their own funding shortfalls.
“Our top goal remains clear,” Atkins said in a statement. “Avoid having the state become part of the economic problem, which means avoiding cuts to programs and middle-class tax increases that do more harm to the economy than they provide in terms of budget-balancing benefits.”
Assemblyman Phil Ting, the San Francisco Democrat who chairs the Assembly Budget Committee, stressed the need for another round of financial aid from Congress, where negotiations for a relief package broke down last month.
“We cannot take our eye off the ball,” Ting said in a statement. “The improved fiscal outlook gives us a little breathing room, but we still need help from the federal government.”
Alexei Koseff is a San Francisco Chronicle staff writer. Email: alexei.koseff@sfchronicle.com Twitter: @akoseff
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State budget looking at $26 billion windfall next year, but money woes remain - San Francisco Chronicle
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