California faces largest-ever budget deficit at $54.3 billion

The coronavirus pandemic has plunged California into its biggest-ever budget deficit, a gaping hole that will dwarf even the worst years of the Great Recession, the state budget office said Thursday.

In a release outlining initial estimates of the coming recession, the California Department of Finance estimated the state would face a budget deficit of $54.3 billion in the coming year — a staggering number that adds up to more than a third of the state’s entire general fund from last year.

That number is more than the combined budget deficits that California faced in 2008 and 2009, the beginning of the last recession.

“The COVID-19 pandemic has caused enormous hardship for families, businesses and governments across the world, the United States, and California,” the report said. “The widespread economic interruption caused by the global pandemic is unprecedented in modern history.”

The deficits from the last recession forced former Govs. Arnold Schwarzenegger (R) and Jerry Brown (D) to make deep cuts to state services in order to balance budgets. California’s government had only just finished restoring many of those services in recent years.

Now, the onus falls on Gov. Gavin Newsom (D) to make his own painful cuts. In January, Newsom proposed a $222 billion budget that would have invested billions in new spending to address the homeless and housing crisis, and billions more to fight wildfires that have grown increasingly intense in recent years.

Newsom had proposed $12 billion in spending over five years to combat climate change, expanding Medicaid to cover all state residents over the age of 65 and socking away $2 billion more in a rainy day fund meant to mitigate the worst effects of the next recession, whenever it hit.

As Newsom prepares to offer a revised budget later this month, his proposal is certain to look much different than his ambitious plans in January.

California has saved a projected $18 billion in its rainy day fund — far more than any other state in the country, but just a third of the deficit it now faces.

The unprecedented deficit will be caused by a one-two punch of job loss and service requests: More than 4.2 million California residents have lost their jobs since mid-March, meaning a drastic downturn in income and sales tax receipts the state once counted on for revenue. Those newly unemployed have sought the benefits they are owed, a rush that has created a major backlog in the unemployment insurance system while also forcing California to borrow from the federal government to cover costs.

California is likely to lose a quarter of the personal income tax receipts it had anticipated earlier this year, and 27 percent of its sales and use tax. The state income from its corporation tax also stands to drop by more than 22 percent.

The Department of Finance estimated that the state’s unemployment rate will balloon from a record low of 3.9 percent before the coronavirus pandemic struck to 18 percent in the coming months, a third higher than the peak California reached during the previous recession.

The economic losses will fall most heavily on low- and middle-income Californians, the agency estimated. Those residents, left behind by the decade-long post-recession recovery, only regained their footing and started seeing pre-recession wage gains in the last two years.

In just the first hint of how deeply the state will have to cut its budget, the Finance Department said the state Constitution would mandate an $18.3 billion cut in funding for K-12 schools and for community colleges.

Governors across the country have been pressing Washington for more funding in the fight against the coronavirus. Congressional Democrats have been leading the charge to provide additional federal aid to states.

Senate Majority Leader Mitch McConnell (R-Ky.) has not supported those efforts, but several GOP senators are now pushing for more financial assistance to states.

Updated at 1:08 p.m.