California Sees $26 Billion Windfall Defying Dire Forecast

(Bloomberg) -- California will have a $26 billion windfall to help balance next year’s budget, an unexpected cushion against the pandemic-led recession as revenue exceeds earlier dire predictions and costs fall below expectations.

The latest revenue and spending report by the state’s nonpartisan Legislative Analyst’s Office is in stark contrast to the doom predicted early this year, when the world’s fifth-largest economy ground to a halt in an attempt to stop the spread of the coronavirus. The analyst’s office said the windfall is “entirely one time” and revenue could end up $10 billion above or below the latest estimate.

“While negative economic consequences of the pandemic have been severe, they do not appear to have been as catastrophic from a fiscal standpoint as the budget anticipated,” the report said.

California is among states nationwide that have seen tax collections outperform expectations as the recession left many high-income, white-collar workers unscathed and stock prices rallied, increasing revenue from capital gains.

Related story: N.J., California Are Seeing More Tax Revenue Than Expected

Governor Gavin Newsom and lawmakers entered this year expecting the state’s rainy day fund to swell to more than $18 billion as the decade-long economic expansion filled its coffers. The pandemic left them instead grappling with a projected $54.3 billion two-year deficit.

In June, Newsom signed a $133.9 billion budget 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.

Collections from the state’s three largest taxes so far this fiscal year have been 22% over assumptions. It’s a reflection of the “rapid but uneven recovery,” the report said. While many low-income residents remain jobless, wealthy residents -- who account for the bulk of tax payments -- have reaped the benefits of a rebound in investments and stable employment, according to the report.

The analyst’s office said lawmakers can use the one-time windfall to fill an estimated $5 billion deficit in the budget year that begins in July. That gap is estimated to grow to as much as $17 billion by 2024.

“We agree with the overall trajectory of the state’s fiscal condition that the LAO describes -- a welcome but short-term revenue surge that will allow the state to make critical investments targeting the impacts of the COVID pandemic,” Newsom’s finance department spokesperson H.D. Palmer said in a emailed statement. “While the budget is better off than we had feared several months ago, deficits are still on the horizon, and better-than expected revenues haven’t translated into an economy that’s fully rebounding.”

In a statement Tuesday ahead of the report’s release, Senate President Pro Tempore Toni Atkins said her priorities include restoring cuts to schools and to items such as employee compensation that were to have been backfilled by a federal rescue, which didn’t end up happening.

“Our top goal remains clear -- avoid having the state become part of the economic problem, which means avoiding cuts to programs and middle class tax increases that do more harm to the economy than they provide in terms of budget-balancing benefits,” Atkins said.

Newsom will present his budget proposal for the next fiscal year in January.

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