‘Here we go again.’ Pay cut for state workers would hammer Sacramento as it reels from shutdown

Less money for lunch at newly reopened restaurants. Fewer trips to newly reopened shopping malls. A postponement, perhaps, of that new car.

Whether it’s furloughs or pay cuts, any decrease in salary for state workers will further depress the economy in Sacramento — and bring dismal reminders of the “furlough Fridays” of a decade ago.

It also represents a jarring setback to an economy that’s just beginning to open again for business after weeks of shutdown because of COVID-19.

“It doesn’t bode well for reopening the business, right, when many of your customers are taking a pay cut,” said Patrick Mulvaney, chef and owner of Mulvaney’s B&L restaurant in midtown, where 50 workers have already been let go. “But many things don’t bode well.”

Facing a $54.3 billion deficit because of the coronavirus pandemic, Gov. Gavin Newsom plans to impose furlough days or 10 percent pay cuts in his revised budget, the president of SEIU Local 1000 told state workers late Wednesday. The new budget blueprint was released Thursday.

Newsom’s plans for the state budget will add to the region’s economic problems. The state employs more than 92,000 workers in the four-county Sacramento area, not counting the universities. That’s about 9 percent of the region’s workforce.

The impact is even more pronounced in Sacramento County, where state government accounts for about 20 percent of the total job market, said economist Jeff Michael of the University of the Pacific.

Newsom’s plan for the state workforce sent area business owners reeling.

“It’s not great. It’s definitely going to affect business,” said Linda Novi, owner of the Mixed Bag gift shop in midtown, which reopened last Friday. “A large part of our customer base is employed by the state.”

Mark Friedman, owner of Arden Fair mall, which just reopened for curbside pickup, put it this way: “It’s bad news for everybody.” The mall was already shellshocked by Nordstrom Inc.’s decision to close its store permanently.

Greater Sacramento’s unemployment rate jumped to 4.7 percent in March, and the April numbers are certain to be far worse when they’re announced next week. In his budget presentation Monday, Newsom predicted the state would reach an unemployment rate as high as 25.4 percent, well above the jobless rate of 12 percent during the Great Recession.

“These are not ordinary times,” he said, adding it will take multiple years to erase the deficit.

As for the pay cuts, he said, “None of us in state government will be immune from tightening our belts.” He said he and his staff will take reduced pay as well, and he said state departmental budgets should shrink as well.

“We could do without as many cars, without as many cell phones, without as much in our travel budget,” he said. “You deserve a leaner government.”

‘The majority of our customers are state workers’

Newsom isn’t raising the specter of layoffs, and state government remains an island of relative stability in the region’s economy. But cuts in state worker compensation can also act on a drag on the recovery, experts say.

Michael said the governor’s plans remind him of the “furlough Fridays” imposed by Gov. Arnold Schwarzenegger during the Great Recession. Those cutbacks idled much of downtown and midtown three days a month, carved tens of millions of dollars out of the area’s economy and prolonged the economic downturn.

Back then, “we found our business decreased, enough to be memorable,” said Randy Paragary, whose Cafe Bernardo restaurant is a stone’s throw from a state office building on R Street. “That’s our No. 1 industry.”

Michael said the sense of deja vu is striking.

“Here we go again,” the UOP economist said. “It’s happening quick. It’s not the largest employer in town closing or mass layoffs. But this is the way recessions hit Sacramento.

“We already see households saving more and spending less,” he added. “This will reinforce that behavior. There certainly will be a decrease in discretionary spending. It’s going to make it harder on restaurants that are trying to reopen and get out of this hole. Vacations that were canceled this year won’t be made up.”

Zia’s Delicatessen owners Kevin and Anne Crilly opened their 14th and O streets location in December 2012, shortly after the end of furlough Fridays. Their children Jonathan and Angela now run the deli a few blocks from the Capitol while the parents maintain Zia’s downtown Davis flagship.

About 75 percent of Zia’s Sacramento customers are state workers, Jonathan said, and sales have dropped 60 percent during the shelter-in-place order. The deli is only open 11-3 p.m. daily and closes on Sundays and state holidays due to a lack of business.

If employees at the Capitol, Department of Veteran Affairs, Department of Education or other nearby offices take more days off or pack lunches more often because of economic stress, the impact would ripple through Zia’s, Jonathan said.

“We love our state employees. It would definitely hurt us to not have them around,” Jonathan said. “We’re not in midtown here. Downtown is definitely still more state-run, and without those state employees the downtown area is really going to be affected.”

State workers on average are among the region’s highest-paid workers, Michael said. Figures from the state controller’s office show that most state workers earn anywhere from $66,000 to $141,000 a year in salary alone.

In many parts of downtown and midtown, state workers represent practically the entire economy.

“The majority of our customers are state workers,” said Thomas Quach, owner of Koja Kitchen, a restaurant north of the Capitol. “Especially our lunch, it’s all state workers.”

Bill Andrews, a property manager at Inter-Cal Real Estate, which runs Loehman’s Plaza and other shopping centers, said the centers’ restaurants have performed surprisingly well despite being limited to takeout service. But he said the centers’ tenants will likely feel the impact of Newsom’s budget plans.

“With less money in their pocket, it can’t be a positive,” he said.

Restaurants already in steep decline

Rick Mahan, owner of Waterboy and OneSpeed restaurants, said his business has already been seriously depressed. Waterboy, for example, has lost 75 percent of its revenue. Even with restaurants getting the green light to reopen for in-person dining, he was doubtful that business would snap back right away.

And now this.

“There’s 10 percent less disposable income, (for) going out to dinner,” he said. “It’s just heartbreaking to me.”

Jim Relles, owner of Relles Florist in Sacramento, said, “It’s just another thing the governor’s doing to the economy and I think it’s bad for the economy.”

Kellie Swayne of Dunnigan Realtors said the housing market has held up pretty well so far, but the state worker pay cuts will likely affect business. “It may affect their level of comfort on a purchase price but won’t necessarily take them out of the market altogether,” she said.

Pat Shea of Lyon Real Estate said buyers might think twice about committing to a home purchase. “So much of what we do is based on fear of what’s next,” he said.

On the other hand, he said Sacramento’s relatively low coronavirus infection rate - the lowest of any major metro area in the country - should help the economy turn around quickly. “We’re really in a position to rebound more quickly,” he said.

Rick Niello, owner of The Niello Co. chain of car dealerships, said the region’s economy is better able to withstand cuts in state government than it was during the Great Recession, simply because it has diversified in the past ten years. The healthcare industry, for instance, employs about 50 percent more workers than the state does, according to the Employment Development Department.

Even so, Niello said the salary cuts will be noticed.

“Everybody will be impacted by that, we’re all dependent on the state in Sacramento,” he said.

This story was originally published May 14, 2020 at 1:00 PM.