Governor reworks budget as COVID-19 plays havoc with California economy

SACRAMENTO, Calif. (Reuters) - Ambitious plans to strengthen California’s social safety net will likely be scaled back on Thursday when Governor Gavin Newsom unveils a revised state budget reflecting an anticipated $54.3 billion deficit caused by the coronavirus crisis.

FILE PHOTO: California's Governor Gavin Newsom speaks to the media after casting his vote at a voting center at The California Museum for the presidential primaries on Super Tuesday in Sacramento, CA U.S., March 3, 2020. REUTERS/Gabriela Bhaskar

Newsom started out in January with big ideas, recommending in a proposed $222 billion budget for the fiscal year beginning July 1 that the state set up its own generic drug label, expand public preschool, combat homelessness and spend more on education from elementary school to college.

But the coronavirus has severely weakened California’s once-robust economy - the world’s fifth-largest - wiping out billions in anticipated revenue from taxes on income and sales and leaving the most-populous U.S. state with a predicted 18% unemployment rate for 2020.

A fiscal update prepared by Newsom’s Department of Finance last week showed that 4.2 million people had filed unemployment claims since mid-March, when businesses began closing down under public health restrictions aimed at slowing the spread of the virus.

Along with other expenses incurred fighting the pandemic, California is now expected to face a budget gap of $13.4 billion in the current fiscal year, and $40.9 billion next year, the Department of Finance has said.

That is a dramatic change from the $5.6 billion surplus and $21 billion in reserves the state was expecting before the pandemic shut down its economy.

On Thursday, the Democratic governor will present his revised budget proposal to the state legislature, which is required by California law to pass a balanced budget.

Newsom hinted on Wednesday that he has had to scale back some of his proposals, including administrative funds for firefighting and emergency services, although he said the budget for firefighters and other first responders would increase over 2019.

Education spending in the state is set by a formula based on revenues, so with anticipated tax payments going down, funding for schools could also drop. With revenues anticipated to decline by about $32 billion, the amount that state law requires to be spent on schools will also drop, by about $18 billion.

This week, Newsom along with governors of several Western states requested $1 trillion in aid from the federal government to help defray some of the costs of fighting the coronavirus pandemic and its ravaging impact on their economies and budgets.

Reporting by Sharon Bernstein; Editing by Peter Cooney