July 3, 2025 Breaking News, Latest News, and Videos

Get Ready For Biggest Budget Crunch In 12 Years

As of the end of last year, California’s budgetary rainy day fund amounted to about $20 billion. That sounds like a lot, and the last two governors both put more cash than legally required into the fund.

Now the rainy day has arrived. Skies are dark, figurative rain clouds loom over the Sierra Nevada and other mountain ranges. It’s almost time to tap into the rainy day fund. But it would be unwise to take all the money at once, just as no family should exhaust all its savings in one fell swoop, if at all possible.

For the coronavirus pandemic, now about six weeks old in California, brought with it enormous personal and corporate financial losses, which will soon translate into vastly lowered revenues for state government. That may last awhile.

Personal income taxes for 2020, mostly to be paid next year, will be much lower than this year’s and last year’s unless the stock market rockets back up at the same extended record pace it has lost ground over the last two months. With most businesses shuttered and restaurants, bars, sports teams and their arenas all idled to avoid disease contagion, corporate taxes will also skid. Income tax revenues will fall, too, because of the layoffs and unemployment the closures have brought.

The last time anything like this happened to California, in the fiscal crisis of 2008-11, these same types of tax receipts nose-dived, and quickly. In 2007, for one example, the state took in $11 billion worth of capital gains taxes. The very next year, capital gains tax receipts came to just $2.3 billion, a drop of about 80 percent.

Capital gains taxes paid to the state were about 50 percent higher in 2018 and 2019 than in 2007. They will likely come to about $15 billion this year. But they will certainly drop in 2021, and by at least as much as in 2008, barring a miracle stock market recovery.

The rainy day fund can make up some of this, but not all. And that won’t account for the anticipated income and corporate tax dollars the state will not be getting.

All of which means anyone or any program dependent on state budget support needs to get set right now for serious belt-tightening on a scale unseen in more than a decade. The days of relatively easy money are over.

This means the $2 billion Gov. Gavin Newsom promised to contribute toward housing the homeless probably will be cut or will simply evaporate. It means plans for the massive tunnel the governor would like to bore beneath the Delta of the Sacramento and San Joaquin rivers may not advance nearly as fast as expected. It means schools must prepare to spend far less in the 2021-2022 academic year than they have lately. It could mean a big cut in state support for the University of California and the Cal State system, both of which saw such backing sliced dramatically during the last fiscal crisis.

Many more programs and proposals will also be affected, but it’s hard to pinpoint Newsom’s priorities and the Legislature’s.

They probably don’t even know those priorities today, and will likely spend months hashing it out. If Newsom is wise, the scheduled May revision of his proposed 2020-21 budget will slash many categories even if the state begins to pull out of immediate crisis mode by then.

That way, state government could spread the harm from the coronavirus financial crisis over at least two or three years, rather than imposing all the needed cuts at once a year from now. Yes, this would be bitter medicine for a state already disrupted by the pandemic, but it would be easier to take than the kind of massive slashing that would come next year if everything is left intact in budget negotiations this spring and summer.

All of which means that anyone who thought the far-reaching ripples of the viral threat were already pretty bad now needs to get ready for further crises to come.

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