The economic toll of the coronavirus pandemic will likely take a slice out of construction spending by the state, based on the numbers released in Governor Gavin Newsom’s May Revised 2020-2021 budget.

The new $203.3 billion proposal would borrow money from “internal accounts” to help make up for a projected $54.3 billion budget deficit, as defined by the Governor during his May Revise presentation, along with “revenue enhancements (i.e., taxes).” 

Recent history (the 2008 housing collapse) showed us that the state now has a playbook for financial catastrophe, stuff they used then and will pull out of the old trick bag now.

They will pull back funding provided in recent budgets and law that is still unspent. For example, the state could return money to the General Fund for infrastructure and maintenance projects that have not begun construction.

They will go into slomo—slow motion like we used to see when there were sports broadcasts—in both awarding contracts and paying bills.

They will take money from agency reserves by the innocent phrase “borrowing internal accounts.” Internal accounts include special funds like the California Air Resources Board’s “Cap-and-Trade” program that generates billions every year. 

They’ll also pillage transportation funding, which is another problem for construction as anticipated increased revenue under SB1 vanished in the COVID cloud when the state went into lockdown. It took four-plus years to repay the internal accounts borrowing from 2008, which also slowed state construction at every level.

 

Not Everything Is Bleak

Now that the revised budget is released, it goes to the legislature for review, modification and approval—all by June 30th.

Gabriel Petek, the new head of the nonpartisan Legislative Analyst Office (LAO), says the shortfall could be as “little” as $18 billion if the economy recovers quickly…or as much as $31 billion in the obverse. Petek, former managing director of Standard & Poor’s office in San Francisco, was overseeing S&P’s rating analysis on California and Illinois when appointed to the LAO post in January 2019.

If Petek’s bottom line number is right, then the “rainy day” fund instituted under Jerry Brown can supply $10 billion to help fill the hole…for this year, according to Petek, but:

“It’s not like this is a shock to the economy and a shock to the budget, and then everything will go back to normal,” Petek said in a May report. “Our analysis suggests this is going to be a multiple-year problem.” 

That means budget deficits could continue until at least 2024 and total $126 billion.

 

By Brendan Slagle, ECA President Email: [email protected]