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Analyst Forecasts One-Time $26 Billion Windfall for California Budget

SACRAMENTO (CBS SF/AP) — California's legislative analyst said Wednesday that the state will see a one-time, $26 billion-windfall in its next budget year, as the economic consequences of the coronavirus pandemic have not been as severe as anticipated.

But analyst Gabriel Petek warned that the eye-popping windfall is solely the result of the state overestimating what was expected to be a $54 billion budget deficit in the current spending plan. Going forward, the state's spending commitments will still outweigh its projected revenue, resulting in a small operating deficit in the 2021-22 budget that will grow to $17 billion by 2025.

"While negative economic consequences of the pandemic have been severe, they do not appear to have been as catastrophic from a fiscal standpoint as the budget anticipated," Petek's report said. "But, the recovery has been uneven. Many low‑income Californians remain out of work, while most high‑income workers have been spared."

While the pandemic has put millions of people out of work, most of them have been low-wage workers who earn less than $20 per hour. Petek said the people who earn more than $60 per hour and account for most of California's tax payments have been largely unaffected financially, with many continuing to work from home.

The spending plan that lawmakers passed in June included several actions — spending cuts, tax increases, pulling from reserves — to make up for an expected $54 billion deficit. They did that in part to make up for what they predicted would be a 15% drop in tax collections because of the pandemic.

But so far, tax collections have been 9% higher than the previous year, meaning the state has collected $11 billion more than it anticipated.

Petek warned that the money could only be spent once. Going forward, the state's spending commitments are still more than it's projected revenue, leading to a small operating deficit in 2020-21 that is expected to grow to $17 billion by 2025, Petek said. State revenue in 2021-22 would need to be $5 billion higher than projections to eliminate that deficit.

California's budget year runs from July through June.

Adding to the uncertainty is the recent surge in coronavirus cases that prompted Gov. Gavin Newsom to impose tighter restrictions on most businesses and contemplate a statewide curfew that could trigger another round of job losses.

"Current unknowns about the economic outlook create an unprecedented amount of uncertainty about this fiscal picture," according to an analysis released by the Legislative Analyst's Office.

Petek recommended Newsom and the Legislature put half the expected $26 billion windfall into the state's savings account and use the rest to address fallout from the pandemic.

Newsom will release his spending plan in January. Monday, he said his top priority will be "to support our small businesses that are trying their best to weather this storm."

Democratic legislative leaders welcomed the news of the windfall but said they would be cautious. Senate President Pro Tempore Toni Atkins said "challenging times are not behind us."

Phil Ting, Democratic chairman of the Assembly Budget Committee, said that while the improved outlook gives lawmakers "a little breathing room," the state still needs help from the federal government to help with recovery. He said he would release a summary of the Assembly's budget proposal next month.

"We cannot take our eye off the ball," Ting said. "While the wealthiest individuals and corporations have gotten richer during the pandemic, there are millions more struggling Californians and businesses that need support to weather ongoing economic uncertainty."

© Copyright 2020 CBS Broadcasting Inc. All Rights Reserved. The Associated Press contributed to this report.

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