California Weighs How to Spend Surprise Windfall in a Pandemic

(Bloomberg) -- California Governor Gavin Newsom is set on Friday to unveil his budget for the next fiscal year, detailing how he plans to spend a windfall estimated at up to $26 billion that the state has accumulated despite the pandemic-induced recession that’s left thousands of businesses shuttered and 1.5 million people still out of work.

Newsom has already said he wants to spend $300 million to aid in the vaccine rollout, $2 billion to help schools reopen for in-person instruction, $1 billion to help small businesses and $2.4 billion to send $600 stimulus checks to about 4 million low-income Californians.

The one-time largesse is largely due to an unexpected strength in tax collections from the state’s wealthiest residents who have reaped the benefits of a rebound in investments and stable employment, while lower-income workers lost their jobs in the pandemic. Meanwhile, the state’s reserves of about $16 billion have softened the blow of cuts, and impending Democratic control of the U.S. Senate has increased chances of additional federal aid to California and other local governments.

“The state is in much better financial condition to avoid the very large cuts that they’ve had to do in the past that cut significant services right when California residents needed it the most,” said Dora Lee, director of research at Belle Haven Investments. “The California budget is in some ways a situation where some other states might be envious and would like to be in.”

Still, California will see deficits over the next few years as revenue trails expenditures, the nonpartisan Legislative Analyst’s Office warned in November. It’s also facing the exodus of high-profile corporations, with Hewlett Packard Enterprise Co., Oracle Corp., Palantir Technologies Inc., Charles Schwab Corp., McKesson Corp., and Colony Capital Inc. announcing their plans to relocate to lower-tax locales in recent months, as well as the departure of wealthy entrepreneurs such as Elon Musk. This is of particular concern to California, given that nearly half of its personal income tax collections come from the top 1% of earners.

Plan Ahead

Lee and other municipal-bond investors said they want to see the budget addressing immediate needs as well as preparing for the challenges ahead.

“What’s the plan for next year and the future years? We hope there’s little to no reliance on one-time items,” said Bernhard Fischer, senior analyst at Principal Global Fixed Income, which manages $11 billion in municipal bonds. “We expect the state to maintain balance and not erode its liquidity.”

In May, Newsom’s administration said the state was facing a $54 billion two-year shortfall driven by the pandemic, a reversal from earlier in the year when it anticipated a $5.6 billion surplus and padding its rainy-day fund to $18 billion.

The Democrat then signed a $133.9 billion budget for this fiscal year that slashed employee compensation and aid to the state’s two higher-education systems. It also deferred $12.9 billion in payments to schools and community colleges and borrowed $9.3 billion from other funds. The cuts were to be backfilled by additional federal aid by October, which never materialized.

Restore Cuts

But tax collections started to exceed expectations in July, the first month of the fiscal year. Through November, revenue is about 23% over assumptions.

Before Newsom’s budget presentation, Democratic leaders of both legislative chambers said they wanted some of the windfall to restore the cuts made in the current year budget, and showed support for his $600 stimulus checks. The budget will be revised in May ahead of a June deadline for passage.

“Through the Golden State Stimulus, Californians who have been impacted by this pandemic will get help to provide for their families and keep a roof over their heads,” Newsom said in a statement on Wednesday.

Here are Newsom’s proposals announced before Friday:

• $600 checks to low-income Californians included undocumented immigrants
  • Would also extend eviction moratorium with assistance from federal funds

• $4.5 billion plan to boost businesses with grants and tax credits

  • Includes $1.1 billion in grants to small businesses for pandemic relief that Newsom wants to be approved by lawmakers quickly
• $2 billion to reopen schools starting in February with youngest grades first
  • Seven superintendents of districts including Los Angeles, the nation’s second largest, criticized the plan as failing to do enough for low-income communities and leading to a patchwork of safety standards
• $300 million for improving Covid vaccine rollout