By Jim Wunderman
Special to CalMatters

Here’s a cure for California’s growing fiscal disaster

May 20, 2020 | Covid-19, Economy

One of the most interesting and important debates around COVID-19 is the question of whether the cure – sheltering in place and sidelining much of our economy – is worse than the disease.

I’m not here to offer an opinion on that, but rather to propose another quandary we are about to face: whether the “cure” for our mounting fiscal woes – massive cuts in California government services – is actually worse than the “disease,” a short term fiscal shortfall of massive proportions.

I believe there is a much better approach. A state Economic Recovery Bond would offer us a temporary fix to a temporary problem and allow us to blunt the worst fiscal impacts of the shutdown. I’m sure many will vehemently disagree, but that’s what open debate is about, right?

Please let me explain.

California is slowly beginning to reopen portions of its economy as efforts to halt the spread of the COVID-19 pandemic gain traction. The human toll from this virus has been horrific, although many thousands of lives were spared by fast action on the part of the governor, mayors and regional leaders who ordered our shelter in place and other restrictions ahead of the nation.

The economic toll has been predictably profound, shuttering thousands of businesses and leaving more than 4 million out of work. We have a long way to go to achieve a full recovery, with many questions about the future yet to be asked or answered.

Because California is so dependent on taxes that cycle with the economy – especially the personal income tax which makes up 69% of the state’s General Fund – most economists in and out of the government predict that the economic fallout from the virus will cause dramatic reductions in critical public services at the state and local levels.  Everything from health care and public safety to human services, education, transportation and housing are deeply at risk.

Gov. Gavin Newsom recently estimated the state could face a $54 billion deficit in just the next couple of years. Cities and counties are predicting their own similarly stunning shortfalls. Many are beginning the difficult work of deciding which programs and services to eliminate or cut. The state’s own budget debate will begin in earnest when Newsom lays out his May Revise today. We’ll expect to see reduced staffing across the board, less support for critical health and human services, and deep cuts to a wide range of social, recreation and cultural programs.  Police and fire departments may not be spared, given the magnitude.

We’ll potentially see a number of municipal bankruptcies. Our efforts to confront the homelessness crisis could well be stymied as the availability of resources withers.

While the fiscal impacts of COVID-19 are clearly devastating, it pays to note that the economic impacts, while huge, are likely to be temporary.  The fiscal breakdown we’re seeing is not the result of a weak economy.  Quite the contrary. California, despite its business climate challenges and uneven economic opportunities across the state, has been growing quite well overall. This has allowed the state to address many key issues by consistently growing its budget at the same time we’ve put aside a $24 billion rainy day fund.

If we stay focused on recovering the economy, which we must do in earnest, there’s no reason we can’t come back just as strong or even stronger in a few years.  The Governor’s Task Force on Business and Jobs Recovery and numerous local efforts are focused on just that, considering how California can actually improve our economy while focusing on enhancing environmental sustainability and social equity.

Remember that California has tremendous advantages.  We are the national and global center of innovation, science, entertainment and agriculture. The leading-edge, knowledge-based industries are largely here.  We are home to the world’s top public research university system and many of the top private universities.  Investors appreciate our diversity and free-thinking ways. Fifty percent of venture capital invested throughout the country is invested in California.  Many of the companies engaged in seeking treatments and cures for COVID-19 are headquartered in the Bay Area and San Diego – the most prolific life sciences/biotechnology clusters in the world.

That said, the way the state’s constitution is constructed, spending has to match revenues in any given year.  Therefore, because we are experiencing what is likely a temporary economic meltdown, the years of work to build up capable and credible programs could well be set back dramatically and repairs may take years – it’s not easy to first undo and then redo government.

So much of what we have strived to achieve is now at risk.  For example, thanks to our investments California is coming close to providing universal health care – about 93% of Californians are now covered. Do we want to retreat from that?  We’re back in the ballgame, nationally, in terms of how much we invest per student in public education. Should we go back a decade to when we were nearly last?  Four-year colleges, which unlike public schools lack any constitutional funding guarantees, have been inching back up over the years since the mortgage meltdown, but will likely suffer severe cuts when legislators are faced with the task of balancing the budget where overall, revenues have dropped by a third or more.  The list goes on.

While federal assistance, through the bipartisan CARES Act and the latest $3 trillion proposal, is deeply needed and welcomed, we know that there will be limitations on the effects of federal help.  California, the 5th largest economy in the world, will have to play a role in maintaining those things that are important to us.

Without question, many groups will propose a bevy of new taxes as the best way to address the shortfalls.  But pinning new taxes on businesses and investors at the very time we’re urging them to re-invest, rehire and reopen is the worst thing we can do.

California’s taxes – personal income tax, sales tax – are already the highest in the country.  Even before COVID-19, many businesses announced their plans to leave the state or were rethinking their strategies for growth.  If anything, in terms of recovery, California should be using this moment to consider strategies to incentivize businesses to start, restart growth and stay here.  In addition – even if you think they make sense, most tax measures require a two-thirds vote and are very difficult to pass, since they target specific groups that can coalesce to defeat them.

A state Economic Recovery Bond offers us a much better approach for avoiding the worst effects of the current fiscal meltdown. The immediate infusion of revenue would be paid back against future revenues and allow California to get through the pandemic without taking giant steps backward as a society.  We can ensure that the bond proceeds are directed to preserving existing critical government programs and services at state and local levels.

California could take advantage of historic low interest rates, pay back the proceeds over 10 or 15 years and not sacrifice the gains we’ve made or subject our people, communities and workers to needless pain and the undoing of that we have worked hard to get.

To do this, of course, in typical California fashion, we’ll need to go to the ballot as our Constitution doesn’t allow borrowing without public approval.  In this case it would require a constitutional amendment. To make this happen, we would need the political leadership of the governor, Legislature, and opinion leaders to bring us together around the idea that while borrowing money is not the greatest thing we can ever do it’s better than the alternative – especially at a time like this.

Let’s start the debate.

_____

Jim Wunderman is president and CEO of the Bay Area Council, a nonpartisan, regional public policy and advocacy organization, jim@bayareacouncil.org. He has also written about the Dynamex fight. He wrote this commentary for CalMatters, a public interest journalism venture committed to explaining how California’s Capitol works and why it matters.

The author wrote this for CalMatters, a public interest journalism venture committed to explaining how California’s Capitol works and why it matters.

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