Economy – Public Policy Institute of California

The Economic Toll of COVID-19 on Small Business

[vc_row][vc_column][vc_column_text]Fifty-six percent of California small businesses experienced “large negative” effects from the pandemic, according to a recent Census survey—a survey that includes businesses with up to 500 employees. Sectors hit hardest by initial job loss face the most severe setbacks. As small businesses weather closures brought on by COVID-19, policy efforts to support them will be important for the state’s economic recovery.

Ninety-five percent of businesses are very small businesses with less than 50 employees, and these businesses employ one-third of California’s workers. Unemployed Californians will need workplaces to return to after the state recovers—small and very small businesses are a common place for workers to land.

In response to the pandemic, about three-quarters of small businesses in hard-hit sectors, such as food service and entertainment, have had to take dramatic measures. That is, today business owners in these sectors are much more likely to have laid off employees, decreased employee hours, or suffered revenue losses since mid-April, compared to other sectors.

Compounding these struggles, many small businesses have already missed scheduled payments such as rent, utilities, or payroll. The impact has been particularly stark in accommodation and food services, where nearly two-thirds of business owners have missed payments since March 13.

Very small businesses are more likely to be owned by women and nonwhite Californians than larger businesses. Latinos own 11% of these businesses but only 2% of larger businesses. Similarly, Asians own 23% of very small businesses versus roughly 10% of larger businesses. In California, women run 22% of such businesses, compared to 7% of larger businesses.

Within the industries hit hardest by COVID-19, very small businesses with less than 50 employees have even higher rates of Asian, Latino, and women ownership. In particular, one-third in this heavily affected sector—for example, restaurants and retail—are Asian-owned. Women also own 26% of very small businesses in these industries; another 20% are jointly owned by men and women.[/vc_column_text][/vc_column][/vc_row][vc_row max_width=”80″ visibility=”visible-desktop”][vc_column][vc_column_text][infogram id=”1pj99903epwez1i6zzgjry1njeamvd0vkmz?live”][/vc_column_text][/vc_column][/vc_row][vc_row max_width=”80″ visibility=”visible-tablet-landscape”][vc_column][vc_column_text]

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[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Despite policymaker concerns about the survival of small businesses, initial efforts to provide assistance have fallen short of expectations. Over 88% of California small businesses in accommodation and food services applied for federal assistance through the Paycheck Protection Program (PPP), yet only 27% received any support. For other federal programs like Economic Injury Disaster Loans (EIDL) and Small Business Administration (SBA) Loan Forgiveness, less than half of the businesses in hard-hit industries that requested funding received any.

Policies to help these businesses manage the current downturn will influence the state’s economic recovery. Small businesses employ many of California’s workers, and small business ownership offers a path to economic mobility and success. In addition, young businesses—many of which are small—play a particularly important role in job creation.

While federal assistance will remain critical, state and local efforts can help fill the gap. Because some communities lack sufficient resources, state efforts to provide financial assistance through the Small Business Loan Guarantee Program are a step in the right direction.[/vc_column_text][/vc_column][/vc_row]

How the Pandemic Has Disrupted Food Chains

The COVID-19 health emergency has changed what we eat and where we eat it. We talked with Dave Puglia, president and CEO of Western Growers (which represents family farms growing fresh produce) and a member of the PPIC Water Policy Center advisory council, about how these changes are affecting California’s agricultural sector.

PPIC: How has the pandemic affected food supply chains?

DAVE PUGLIA: The pandemic shut down the food service sector—restaurants, schools and universities, hotels—so suddenly and completely that it just blew up supply chains. This caused many farmers to divert their produce from food service outlets to retail markets. That added more confusion to the food chain, as certain commodity prices dropped like a stone due to oversupply, while some other crops did quite well, fueled by people buying more produce that is less perishable. Foods like carrots, onions, and potatoes have been flying off the shelves.

Those first few weeks were incredibly damaging to American agriculture, and particularly the fresh produce industry. California’s desert region was in full swing for harvesting when the shutdowns began. I watched one of my members plow 350 acres of romaine lettuce into the ground. A lot of fresh produce made it to food banks—our members doubled the amount they usually ship to them—but we saw some food banks wave off perishable fresh produce, which requires adequate cold storage space and must be distributed quickly. For growers, transportation was an added cost.

We’re not out of the woods yet. The food service sector is still largely shut down. California’s coastal farms are now starting to harvest. They had to project a month ago how much crop to plant without knowing if restaurants will be open, half open, or still closed. And for those with permanent crops—table grapes, nuts, and stone fruits—their crops are coming. They’ll have to make these same tough decisions about whether it pencils out to pay for the labor, shipping, and cooling costs to harvest their crop. To put it in perspective, harvesting—which includes labor and energy—comprises about half the costs to produce, say, an acre of lettuce.

Farming has always been a risky business, but this has created an impossible guessing game for growers in fresh produce.

PPIC: What can be done to help get more farm products to emergency food programs?

DP: The top priority is to inject capital into the food system now. Ideally, the federal government would increase food purchases so we can deliver more produce to food banks and organizations that serve people in need. The CARES Act began to fund this, but the amount was small—$600 million over six months, across the whole country. That won’t buy a lot of food. The quickest way to help is to dramatically increase funding to this program.

At the state level, increasing the tax credit for food going to food banks could help. Currently, California has a 15% tax credit on the value of produce that the state’s farmers deliver to food banks. Clearly, the state needs every tax dollar it can get, but if we’re trying to keep farmers going so they can continue to grow our food and support the economy, that would be a good way to help.

PPIC: What further steps would mitigate the damage?

DP: The immediate need is for the federal government to expand its agricultural relief package in the CARES Act. The caps on the relief package were not practical for fresh produce, dairy, and cattle. Growers got $125,000 per farmer, which was appreciated—but it’s a very small amount given the losses for the higher value crops, which cost more to produce. For example, a farmer growing romaine lettuce spends about $10,000 per acre. The average-sized lettuce farm is 225 acres; the relief package covered losses for about 12.5 acres of that. Strawberries cost roughly $50,000 per acre to produce; the relief package covered just 2.5 acres of lost production on the average 55-acre farm.

The state has been helpful in crafting practical guidance for continued operation of our farms, which helped the industry implement distancing very quickly. We have a big challenge there, as these folks work and live in close quarters. It was also very helpful that the governor acted quickly on our request to help farmworkers with emergency childcare. These are mostly families where both parents work and don’t have the option of a parent staying home with the kids.

Going forward, I hope that coming out of this crisis we don’t see a raft of new regulatory costs. The cost of doing business in California is already quite high. If the cost of farming here compared to Mexico or Arizona gets much higher, it will incentivize more farmers to relocate.

PPIC: What changes to California agriculture do you envision coming out of this crisis?

DP: Farmers are amazingly adaptive people, and I’m encouraged by the many California farms that are finding new, more efficient ways of operating and producing food because of this crisis.

Will there be fewer restaurants in two years’ time, or will Americans have returned to their previous habits of eating out? No one knows. But growers will adapt to changing demand, and they’ll respond very quickly.

Overcrowded Housing and COVID-19 Risk among Essential Workers

[vc_row][vc_column][vc_column_text]Some Californians face substantial risk of illness within their own households under the state’s shelter-in-place order. Physical distancing and self-isolation can be virtually impossible in crowded homes, threatening the health of entire households. In crowded living conditions, individuals are at higher risk of transmitting infectious diseases, a factor that may challenge the state’s efforts to manage the pandemic while reopening the economy.

As the high cost of housing is a stark reality for nearly two-thirds of Californians, finding affordable housing can mean cohabiting with several other people. California’s overcrowding rate is well above the national average; the share of housing units with more than one occupant per room is 8.3% compared with 3.4% across the nation. Furthermore, overcrowding is much more common among renters than homeowners (13.4% vs. 4.0%), and in Latino households (18.4% vs. 2.4% of white households).

While most Californians have been staying home to reduce coronavirus transmission, essential workers do not have the option to shelter in place. Over one-third of California’s labor force works in essential occupations that require being physically present. Compared to nonessential workers, they are at higher risk of infection because they continue to circulate among others despite the shutdown.

Essential workers are more likely than nonessential workers to live in overcrowded housing—16 percent versus 12 percent. That share is almost double for workers in farming (31%), and food preparation/serving (29%).

A recent study confirms that essential workers and those in larger households do face a higher risk of contracting coronavirus. It would be ideal to explore the relationship between COVID-19 cases and workers living in crowded conditions. However, inconsistent testing availability across regions makes cases an unreliable measure of the virus’s geographic spread; deaths, which are better measured, are a valuable proxy.

There is a clear link between COVID-19 deaths and essential workers who live in overcrowded homes, though the relationship is muddied by regional differences in terms of the age structure of the population, underlying health conditions, and other factors. Santa Barbara (25%), Madera (23%), Los Angeles (21%), Orange (20%), and Tulare (19%) counties have the highest shares of essential workers in overcrowded homes. Los Angeles and Tulare are experiencing large numbers of deaths per capita, at 14 and 9 deaths per 100,000 people, but the other counties are not.[/vc_column_text][/vc_column][/vc_row][vc_row max_width=”80″ visibility=”visible-desktop”][vc_column][vc_column_text][infogram id=”1p375951mzw3k9c0mex60d30kdidymqxjlx?live”][/vc_column_text][/vc_column][/vc_row][vc_row max_width=”80″ visibility=”visible-tablet-landscape”][vc_column][vc_column_text]

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[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]California will lift some shelter-in-place restrictions in the coming days, and more people will leave their homes to work. Examining work and living conditions together can identify areas where people are least able to take effective actions against the spread of the coronavirus. Designing policies to protect the health of workers and their households will be critical to managing COVID-19 while restarting the state’s economy.[/vc_column_text][/vc_column][/vc_row]

Lessons from the Pandemic for Addressing Climate Change

Clear skies and less air pollution. Dramatic drops in harmful greenhouse gases. What can these environmental “silver lining” aspects of the COVID-19 pandemic teach us about addressing climate change? We talked to Louise Bedsworth—executive director of the California Strategic Growth Council, a state agency that brings together multiple agencies to support sustainable communities and strong economies—about the issue.

PPIC: What has the COVID-19 pandemic taught us about our efforts to tackle climate change?

LOUISE BEDSWORTH: The pandemic has caused us to make a lot of changes quickly, some of which we know are also necessary to tackle climate change—such as the dramatic reductions in travel by car and air. Businesses have implemented telework policies at a scale we’ve never seen before, and meetings that would have taken place in person are now remote. We’ve seen that these sorts of changes can rapidly reduce air pollution and greenhouse gas emissions. Looking ahead, we can think about how to incorporate some of these changes into how we work.

In addition to changes that reduce emissions, we have also seen a number of actions that are important for building resilience. We’re seeing more people out in their communities, walking, biking, and getting outside. And we see people checking in on vulnerable residents, neighbors coming outside to talk to each other, and growing movements to shop at local businesses.

These social connections are really important for building a resilient California—one able to withstand the shocks to come. In the face of a changing climate, we have to reduce emissions, but also ensure that that our people, economies, and ecosystems are resilient in responding to shocks and stresses. And that means building robust equitable communities that can weather these changes together.

We need to think about how we incorporate these lessons going forward—not just in our efforts to reduce emissions but also in how we’re thinking about building resilience in our communities.

PPIC: Do you see any long-term effects arising from the pandemic’s drop in emissions?

LB: We’ve seen what’s possible. We can make changes that have immediate impacts on air quality and emissions. That’s a really valuable lesson. The next step is figuring out how to make some level of these positive changes stick as we come out of the pandemic. For example, what policies do we need to encourage telework, or to encourage people to continue to drive less and walk more? Enabling just one day a week of telework could reduce commuter travel and associated emissions by 20%.

We also have to focus on how we rebuild our public transit systems, which have suffered steep declines in revenue and ridership. I think we have to be honest about the challenges facing transit systems, not just because of the financial hit they’ve taken but also to address people’s fear of being on crowded transit. How can we maintain these important systems even as we encourage more telework, biking, and walking?

PPIC: What are the economic implications of COVID-19 on the state’s climate change efforts?

LB: The pandemic has highlighted California’s equity challenges. Communities with high levels of poverty, joblessness, pollution, and poor health are bearing the brunt of this illness. We have to address the underlying causes of these inequities. The pandemic underscores the need for stronger efforts to reduce pollution and mitigate the effects of climate change—and for solutions that reduce these inequities.

We have to pay attention to how we rebuild our economy. Let’s put people to work to build more resilient infrastructure and a cleaner economy. Our long-term recovery must include investments that are in line with our goals on climate change and the environment, housing production, and quality job creation.

PPIC: What opportunities should we take from the coronavirus crisis to help address the climate crisis?

LB: We need to continue to focus on building a sustainable, equitable California. This includes building resilience in the state’s physical infrastructure as well as in our social and economic systems. If we don’t remain committed to our environmental goals as we recover from this, it will be harder and more costly to fix these problems down the road. In addition to working to maintain some new workplace practices, we need to prioritize actions that promote equity and sustainability. We must redouble our efforts to build safe and affordable housing located near jobs, schools, and transit and create high quality jobs and job training opportunities.

California can set an example for the world. The state is a leader in addressing climate change, but these changes have to happen globally. California must continue to lead by successfully demonstrating how we can emerge from the pandemic fully committed to sustainability and equity.

Lessons from the Great Recession Can Protect College Students Today

[vc_row][vc_column][vc_column_text]Budget cuts for state services are likely on the horizon due to the economic disruption of COVID-19. This means state funding for public higher education may well be reduced—leading to restrictions in access and lowered enrollments. California went through this very scenario during the Great Recession, with thousands of students turning to for-profit colleges in lieu of public colleges.

While some students at for-profit colleges earned a degree, many did not graduate and ended up with large amounts of debt. State and federal government subsequently put restrictions around for-profit colleges, but upcoming changes at the federal level could weaken the federal rules.

The recently announced federal Education Stabilization Fund will disproportionately provide emergency relief funds to private for-profit colleges. In California, only 5% of the state’s undergraduates attend for-profit colleges, but these schools will receive 10% of federal funds.

In contrast, 55% of undergraduates attend the state’s community colleges, which will receive only 34% of federal aid. (That’s because many low-income students who attend community college rely on state aid rather than federal financial aid: these students are not counted in the federal emergency funding formula.)

During the Great Recession in 2008, higher education faced deeper cuts than other state services. With escalating tuition, fewer instructional staff, and a narrow application window, students had less access to the state’s public colleges, especially community colleges.

At the same time, some for-profit colleges began to market heavily, and thousands of students enrolled in expensive programs. By several measures—graduation rates, student debt, loan default rates, and employment outcomes—private for-profit institutions often have poor outcomes. Of course, some colleges have a better track record than others.

People hurt most by the recession—and lack of access to college—were saddled with debt they couldn’t pay back. In response, California and the federal government both instituted new regulations requiring for-profit colleges to be more transparent and accountable.

California went a step further than the federal government. The state required colleges to meet minimum standards of graduation and loan default rates to be eligible for Cal Grants, the state’s financial aid program for low-income students. Enrollments in for-profit colleges in California declined, and some of the largest for-profit institutions, like Corinthian and ITT Technical Institute, declared bankruptcy as the economy improved and funding to public higher education was restored.

California policymakers should seek to avoid the mistakes of the last recession by ensuring that access to public higher education is not restricted during this recession. The key is to find ways to limit budget cuts so that public higher education remains accessible to all Californians looking to advance their knowledge and improve their economic well-being.[/vc_column_text][/vc_column][/vc_row]

Video: Californians and Education

In the era of COVID-19, about eight in ten adults fear getting sick, and 80% expect bad economic times ahead. At a virtual briefing on Thursday, PPIC researcher Alyssa Dykman said the drop in consumer confidence “is unprecedented in the history of the PPIC survey.”

The event featured Dykman, who presented attitudes on K–12 education, funding, and policy preferences along with concerns over the coronavirus pandemic in the latest PPIC statewide survey. PPIC President and CEO Mark Baldassare supplied deeper context for key findings and responded to online questions.

Approval ratings have hit rare numbers: at 78%, approval has surged for Governor Newsom’s handling of K-12 education, and at 92%, public school parents express overwhelming support for school district handling of school closures. COVID-19, however, has shaken support for school bonds, with about half or fewer adults and likely voters saying it’s a good idea now for state government to fund school construction projects.

Baldassare underscored Californians’ concerns around health and finances, stating that two-thirds of adults are worried about both. Many say their lives are disrupted and about half say the stress is affecting mental health.

What do these concerns mean for California schools? “People are giving state leadership and local leadership a lot of leeway in how they respond to the public health and economic crisis,” Baldassare said. But the state will see its first test of this extraordinary support in May, when the governor submits a revised budget that will reflect revenue loss from a sharp economic downturn.

That may also lead to roadblocks for state and local school funding in November. In the March primary, “the defeat of most of the local school bond measures really caught a lot of people by surprise,” Baldassare said. “It was difficult to pass school funding measures.” At the moment Californians are hesitant to commit more funding to schools, which may impact voting on the split-roll property bond measure and others in the November election.

The survey offers several takeaways around planning for California public education. “We’ve never had anything like the school closures that are taking place,” Baldassare said. He reflected that Californians may reconsider the value of teachers going forward, including whether “teachers have the resources they need in order to do the job,” and noted that the public may have “a new understanding of the important and difficult role teachers play every day in the lives of public school children.”

Californians also may now recognize the struggles of vulnerable students, especially in terms of online access.

“It is going to be a test of Californians’ political will,” Baldassare said, “the degree to which we are committed to improving student outcomes, particularly among the large numbers of English language learners and low income students across the state.”

School Funding, COVID-19, and the 2020 Election Year

This post is excerpted from Mark Baldassare’s prepared remarks for the PPIC Statewide Survey virtual briefing on April 23, 2020.

State funding for K–12 public schools will take center stage when Governor Newsom unveils revisions to the state budget in a few weeks. The growing fiscal toll of the COVID-19 crisis is likely to affect school funding plans as a deep economic recession looms. K–12 schools have the largest share of the state General Fund, and many Californians say it is their top priority for state spending. Still, California voters seem to be pulling back their support for school funding on ballot measures.

One of the biggest surprises in the March 3 primary was the defeat of the Proposition 13 state school bond (53% voted no). The last time a state school bond failed to pass was back in 1994. Proponents have tried to explain away this loss as confusion caused by the number 13—the same as the notorious anti-tax initiative that passed in 1978.

However, outcomes of local school bond measures point to a different story. Bucking recent trends, 63% of local school bonds on the March primary ballot failed to reach the 55% threshold needed to pass. It may be that early anxieties about COVID-19 resulted in voter caution about extending debt. In the absence of exit polls to validate this theory, the April PPIC Statewide Survey sheds light on what may have happened. It also offers sobering news for efforts to convince voters to support school funding measures in the November election.

First, though, let’s dispense with the notion that views about school funding have fundamentally shifted. Today, 55% of California likely voters say that state funding for their local public schools is not enough. And 53% would vote yes on a state school bond while 50% would vote yes on a local school bond. Moreover, 53% percent would vote yes on a split roll property tax to fund local public schools—a measure that appears headed for the November ballot. All of these results today are similar to those last April, suggesting that basic attitudes about school funding are fairly stable.

But current conditions appear to be having a strong effect on the timeframe for public support. Our survey was conducted from April 1 to 9—roughly a month from the primary and a few weeks into stay-at-home orders. We find that most likely voters say it is a “bad idea” to issue state (54%) or local (54%) school bonds at this time. Majorities of Californians without children in public school agree (bad idea: state 56%, local 57%). Fewer than half across the state’s regions say it is a good idea to issue these bonds now. Only those with children in public school think that it is a good time to issue state (57%) or local school bonds (58%).

Why? Californians have had their world shaken by the COVID-19 crisis. Since January there has been a 36-point increase in expectations for bad economic times in California over the next 12 months (42% to 78%)—sending us to depths of consumer pessimism not seen since the Great Recession. And right now, 74% percent are worried about negative impacts of the coronavirus on their personal finances.

This pessimism is likely to have profound implications for school funding measures on the November ballot. The state’s fiscal and economic problems will weigh heavily on voters’ minds when they are asked to make decisions on spending, taxes, and bonds. Many may be reluctant to ask taxpayers (like themselves) to foot the bill, or to increase commercial property taxes, to make up for shortfalls in school funding.

We can also expect a rocky road ahead for the governor and state legislature. Although our April survey found a steep rise in the governor’s and legislature’s approval ratings around handling K–12 public education, state leaders now face the prospect of having to cut back on popular plans to increase school funding. During the Great Recession, we saw the governor’s and legislature’s approval ratings tumble with state budget cuts to local schools.

Our surveys will be closely monitoring all of these dynamics as California heads toward a much-anticipated November presidential election.

Many Low-Income Families Left Out of Federal Stimulus Benefits

As part of the federal response to COVID-19, the IRS has started issuing stimulus checks—to boost consumer confidence—directly to millions of families. For the record number of Californians who have lost jobs, hours, and certainty around their incomes, these payments could come just in time.

We estimate that about 81% of Californians live in a family that will receive an “economic impact payment,” with the typical family receiving around $2,200. In total, Californians could receive about $26 billion through the program.

However, nearly 20% of families are unlikely to receive a stimulus check. Because the payments phase out as incomes rise, most of these families are above the income cutoff ($99,000 for single tax filers and $198,000 for joint filers without children). But nearly a third are among the state’s lowest income families. In part, this reflects the fact that only people who have filed taxes recently, or who receive either supplemental security income (SSI) or social security, will receive a check.

People with very low incomes are not required to file taxes, and they will not receive stimulus checks unless they actively share their banking details with the IRS. Partly for this reason, our estimates indicate that just 65% of people in families with the lowest 10% of incomes—less than about $22,000 a year for a family of four—are likely to receive a check.

By comparison, 90% to 97% of those in middle-income families—with annual incomes of $52,000 to $176,000—are likely to receive a check.

Yet even if all Californians who do not file taxes submit their information to the IRS, people in low-income families will still receive checks at lower rates than middle-income families. Because many low-income families include undocumented residents, the entire family is ineligible for these federal payments. If families with undocumented members were eligible, all families from the 11^th to 80^th percentiles of the income distribution could potentially receive a check.

To help Californians during this crisis, the state’s safety net will need to reach those most affected economically. The temporary expansion of unemployment insurance will provide much more aid to certain low-income families than the federal stimulus payments. And California’s recently announced Disaster Relief Fund, which will use public and private funds to provide up to $1,000 per household to families of some undocumented immigrants, will help to fill in certain gaps. But while replacing wages is important, a response focused only on wages would skip many people in need.

Food assistance programs like CalFresh and school meals are also critical safety net supports because of their wide reach, and expansions are also underway. Along with the federal stimulus payments, these are important steps, but—depending on the length and the depth of the crisis—more remains to be done.

Early Insights on California’s Economic Downturn

California’s unemployment rate jumped from a historically low 3.9% to 5.3% in March. For comparison, it took a full year from the official start of the Great Recession for unemployment to increase by 1.4 percentage points (although the levels were higher: 5.9% in December 2007 to 7.3% in December 2008). Notably, the March rate is based on data from the middle of the month, so it does not fully reflect the massive layoffs that occurred as the COVID-19 pandemic took hold.

Between March 15 and April 18, 3.4 million Californians applied for unemployment insurance. There has been much forecasting (including by us) about the sectors and workers that will feel the immediate effects of the downturn. We do not have demographic breakdowns and we don’t know which industries employed these workers. But recently released labor market data can provide some new insights.

By mid-March, California had recorded a net loss of 100,000 jobs, comprising about one-seventh the decline nationwide and reflecting the state’s early response to COVID-19 crisis. That’s less than 1% of the state’s 17 million jobs. The lion’s share of job loss (more than 80%) occurred in three service sectors: arts, entertainment, and recreation; accommodation and food; and “other services” (a category that includes automotive repair, personal care, and dry cleaning).

A comparison with the Great Recession highlights the severity of the current situation. Between February and March this year, employment in arts, entertainment and recreation fell 6.4%. Over the first year of the Great Recession, employment in this sector fell 1.6%. The number of jobs lost in the accommodation and food service sector was much higher between February and March, but these losses represented only 2.7% of the workforce in this much-larger sector.

A look at job losses in the industries that were hit hardest during the Great Recession shows that jobs are being lost much more quickly during the COVID-19 crisis. In the first month, construction—the recession’s most severely affected industry—saw a 2.2% decline, and no other sector experienced losses greater than 2%.

These initial data clearly show that the current crisis is hitting a different set of sectors than the Great Recession. It also shows that workers in the initially affected industries are more likely to be women (52% versus 45%), Latinos (25% versus 22%), and young adults (23% versus 10%) compared to workers in other sectors—and to workers in the hardest-hit industries during the first year of the Great Recession.

As the current crisis continues to unfold, a more complete picture of the workers and industries affected will emerge. The staggering number of recent unemployment claims indicates that the losses in the March data are only the tip of the iceberg. April data will no doubt show deeper declines and a widening impact across sectors.

Unemployment insurance will provide an important economic backstop for many workers over the next several months. However, it will be important to monitor the workers and industries being affected by this crisis, both to ensure that policy efforts are directed where they are most needed and to inform additional measures to mitigate the economic damage.

The Coronavirus Pandemic Will Test the State’s Budget Reserves

As it grapples with the COVID-19 pandemic, California faces an uncertain fiscal future. This global crisis has caused a sharp decline in economic activity, exposing crucial sectors to heightened risk. As discussions continue about when and how to re-open the economy, it is clear that the state will have to respond to significant fiscal challenges.

The good news is that California has made important changes to its reserve policies since the Great Recession. The passage of Proposition 2 (2014) created the Budget Stabilization Account—the state’s rainy day fund—as well as the Public School System Stabilization Account, a separate reserve for K–12 districts and community colleges. In addition, Governor Brown and the legislature created the Safety Net Reserve Fund to shore up Medi-Cal and CalWORKs funding during downturns.

The bad news is that a severe recession is likely to pose significant budgetary challenges. Drawing from the state’s experience during several recent recessions, PPIC estimated the budget ramifications of mild, moderate, and severe recessions and the capacity of state reserves to fill gaps. We found that the state’s reserve balance—estimated to be $17.9 billion—is large enough to withstand a mild recession such as the dot-com bust in the early 2000s.

However, a long and/or severe recession like the early 1980s oil shock (which lasted four years), or the early 1990s slump and the Great Recession—both of which were much more severe and lasted five years—would create large budget gaps and require policymakers to make difficult decisions. (It is important to note that the estimated reserve balance relies on the 2019–20 enacted budget and that it will change when revenue estimates are updated in May.)

In the meantime, the federal government has stepped in. The Families First Coronavirus Response Act includes an increase in the federal share of Medicaid payments and reimbursements to states that are expanding public assistance programs. The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides about $2.2 trillion; some aid goes directly to families, some goes to schools, and some to state and local governments. Additionally, two federal disaster declarations make many of California’s COVID-19 expenditures eligible for at least partial reimbursement.

Governor Newsom has requested additional federal assistance, including flexible aid to state and local governments, a further extension of unemployment insurance benefits, and expanded support for safety net programs, small businesses, K–12 and higher education systems, childcare, and broadband.

The state is also making significant changes to the 2020 budget process. The Department of Finance is drafting a “workload” budget for the May Revision that will set the baseline for the final budget to be enacted in June. This will limit spending increases while allowing for growth in programs—particularly safety net programs—that expect increased demand. The legislature will revisit the budget for an “August Revision” that reflects changes in the state’s financial condition. As these processes move forward, PPIC will continue to monitor California’s evolving fiscal challenges and steps being taken to address them.