November 20, 2020

With the news this week of a multi-billion dollar one-time windfall in 2020-21, interest groups and legislators immediately began positioning their preferred programs for a share of the money, estimated to be between $12 billion and $40 billion. Less attention has been given to the other major projection of the LAO’s Fiscal Forecast, that the state is structurally out of balance, leading to sizeable and growing deficits over the next four fiscal years.

The unexpectedly positive revenue news for next year highlights how reliant the state’s revenues are on well-off Californians and just how heavily the burden of the COVID-19 recession has fallen on low-income residents of the state, many of whom remain unemployed despite the partial economic recovery.

How can the state have a multi-billion windfall and an operating deficit in the same year? The windfall is a result of higher-than-expected revenue and lower-than-expected expenses in the current and prior budget years, while next fiscal year’s revenues are estimated not to meet expenses. Essentially, the state overcorrected for the COVID-19 recession in the short-term, but because the solutions were almost all one-time in nature, the state under-corrected for the pandemic’s long-term economic effects, such as long-term increases in various human service programs.

The LAO recommends the Legislature designate half of the windfall to budget resilience, such as reserves, and the other half to a more robust COVID-19 response than was possible in the spring. They also recommend working to immediately address the structural budget issues, including addressing the multi-billion K-14 payment deferrals enacted in this year’s budget.

If the Legislature goes along with the recommendation to use a significant portion of the unexpected revenue for COVID-19 response, counties will advocate strongly that a piece should flow to them. Counties are on the front lines of providing both the direct medical care for patients and the economic relief necessary to keep Californians and small businesses afloat.

These needs—which range from housing for those without homes to rent relief to free COVID-19 testing to business loans and grants—exceed the funding made available by the state and federal governments this spring and summer, and will continue past the December 31 deadline for spending those funds.

Furthermore, while the state budget will have at least a one-year reprieve from deficit, the fiscal situation at the local level is mixed, with some areas already seeing significant losses to major tax revenues, such as hotel and sales taxes, especially areas reliant on tourism. The outlook for property taxes is not yet known, but likely also to suffer in some areas of the state.

CSAC will work with counties and our allies to advocate for an appropriate share of the funding to address these and other critical needs. As 2020 draws to a close, there’s more work to be done in 2021.