California’s rainy day fund will run dry without federal budget help during coronavirus pandemic

Where are all the critics of California’s rainy day fund? You know, the people who kept insisting that the rainy day fund should be dissolved with money returned to the taxpayers? Funny, we don’t hear a peep these days.

For Californians, the rainy day fund has become a partial salvation of sorts in the state’s effort to manage budget losses associated with the COVID-19 virus. Many state leaders elsewhere are at their wit’s end over how to manage badly needed services at a time with the shutdown of the American economy.

But at least for the time being, California has a cushion of $17.5 billion (originally projected in January to be at least $20 billion) to help maintain basic services until traditional revenue streams from income and sales taxes return. How much is $17.5 billion? Not a lot, given that the state budget general fund for 2019-2020 is about $159 billion. But it’s nothing to sneeze at either, given that the California state surplus is larger than the 5 smallest U.S. state budgets combined.

Officially known as The Rainy Day Budget Stabilization Fund Act, California voters passed the constitutional amendment in 2014 after the state legislature placed the proposal on the ballot. The heart of the proposal directed that during any year of a budget surplus, 1.5 percent of general fund revenues would be deposited into a special fund.

Half of the special revenues would be used to pay down state debt, while the other half would be set aside for times of emergency. At the time, most supporters were thinking about the next recession, given California’s swings are very good when the economy booms and very bad when the economy sours. It’s hard to imagine that anyone thought of the fund as helping to rescue the state from a pandemic, but that’s what has happened nonetheless.

It’s not that the $17.5 billion surplus will make the state whole. But for the moment, the fund has come in handy, to be sure. The problem is that the first $2 trillion commitment made available by Congress a couple of weeks ago has been designated to prop up businesses and fill in personal income gaps. No funds have been designated to replenish state and local government income gaps, however, and that’s a critical hole.

The California state revenue deficit from the shutdown is anything but trivial. With respect to the state’s general fund for the 2019-2020 year, the personal income tax was expected to account for 68% of expected revenues; the sales tax was supposed to account for 20%, with corporate income taxes bringing in 9%.

Given an economic shutdown for what appears to be the last quarter of the 2019-2020 fiscal year, it’s not unreasonable to anticipate a revenue gap in California of between $30 and $40 billion.

Why are these numbers so important? Because they give us insight not only to an unexpected budget shortfall, but the policy areas most likely to be impacted from reduced state government expenditures.

For FY 2019-20, the state committed about $75 billion to K-12 and higher education, followed by $42 billion for health and human services, which serve core safety net programs. Combined, these two broad areas amount to about three-quarters of general fund government expenditures.

Assuming a shortfall in the neighborhood of $30 or $40 billion, the state will be in a world of hurt. Yes, the rainy day fund will help, but it won’t suture the entire financial wound.

It’s not only a matter of state losses. Ignored by the federal government to this point are massive income losses sustained by local governments. In most cases, cities and counties rely on sales taxes as the overwhelming proportion of their revenues.

While state and local coffers dwindle, Congress remains at loggerheads over any meaningful response. In the latest round of relief packages, Senate Republicans have pushed an additional $250 billion for more small business assistance. Nancy Pelosi-led Democrats have vowed to oppose the new aid without additional funds, including $150 billion to replenish state and local government treasuries. If and when the parties will come to terms remains to be seen.

Yet, an incredibly clear fact remains: The only hope for California, and other states for that matter, lies with the federal government committing funds to state and local revenue losses. Without that assistance, economic calamity will prevail in the states long after physical health returns. Even California’s rainy day fund will run dry with the state’s citizens paying the price with badly depleted essential programs, and that’s a loss we can ill afford.