...The State Controller's Office has updated... projections to reflect the delay in the deadlines for filing and payment of the primary General Fund tax revenue sources (personal income tax, corporate income tax and sales tax) to July 15, 2020, and assumes the state will receive approximately $19.8 billion in revenue from April through June of 2020-roughly 39 percent of the estimated receipts for this period reflected in the Governor's January Budget.
The following other significant assumptions are also reflected in these preliminary cash projections:
• The state will receive an $8.4 billion allocation of federal funding pursuant to the federal CARES Act in May 2020; and
• The state will spend roughly $7 billion in emergency COVID-19 response-related expenditures in 2020. The updated cash flow projections conservatively do not reflect additional federal reimbursements in 2019-20 other than the $500 million already received by the state.
Based on these assumptions, the cash flow projections indicate that as of June 30, 2020, the state will have approximately $8.7 billion in available cash and unused internal borrowable resources...
Here is what the letter seems to mean and where it is ambiguous. It says that the delay in income tax receipts will be significant but temporary. Since income taxes are based on last year's income, that may be a reasonable assumption. But the state also receives estimated taxes and tax withholding for the current year. Presumably, that flow will be down due to unemployment and downward estimates of income for the current year. It is unclear whether any adjustment has been made for that effect.
The state had over $38 billion in unused borrowable reserves at the end of March, according to the state controller.** The Dept. of Finance says this will fall to $8.7 billion. So we surmise it is estimating that something like $29 billion will have been burned up due to increased expenditure and decreased (perhaps temporary) revenue at the end of June. It seems to assume that the federal government is going to reimburse the state for the estimated $7 billion it has spent on various coronavirus crisis issues, but that most of that reimbursement will take place after June 30.
It might be noted that the letter indicates that the state has standby plans to issue Revenue Anticipation Warrants (RAWs) in case the cash drain is much greater than projected. RAWs are securities that allow the state to borrow short-term across fiscal years, in this case crossing into the 2020-21 fiscal year. They are issued only rarely during budget crises.
Note that the letter refers only to the state budget. There will be significant impacts on local budgets and on entities that depend in part on fees for service. For example, UC is not going to receive any increase in its budget and has decided not to raise tuition. Until we see the May Revise budget, we won't know for sure what the dollar impact will be. For example, the January budget proposal had (what we view as an artificial) division of proposed state funds into ongoing and one-time. Will the one-time funds disappear or be reduced? What happens to quasi-commercial operations at UC that depend on fees for service: dorms, parking, ASUCLA, the UCLA Grand Hotel, the UCLA Faculty Center?
Local transit agencies typically receive 20-30% of operating revenue from the fare box. But ridership is way down. They typically receive substantial funding from sales tax. Presumably, rocketing unemployment will mean less sales tax. Hospitals, including UC's hospitals, depend on patient revenue. But most elective procedures were cancelled. So they are now receiving lowered revenues. Will they eventually "catch up" when the deferred procedures take place? Over what period? Cities receive various tourism-related taxes (such as hotel taxes) as well as sales taxes? What happens to their budgets?
Will the federal government bail out all of these entities (along with airlines, restaurants, movie theaters, etc.)? If not, there will be pressure on the state to do so, at least for the public sector.*** However, although the governor keeps referring to California as a "nation-state," California lacks one element of a real nation state: a central bank which can create money. If you ask, where did the federal government get the recent $2 trillion that is being dispensed, there is a simple answer as shown on the chart below. At the end of the day, it got it from the Federal Reserve:
*https://issuu.com/danieljbmitchell/docs/4-10-20_covid-19_interim_fiscal_update_jlbc_letter
**https://sco.ca.gov/Files-ARD/CASH/March2020StatementofGeneralFundCashReceiptsandDisbursements.pdf
***The Dept. of Finance letter in the top footnote above includes an attached letter from Governor Newsom to House speaker Pelosi asking for additional federal aid.
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