LAO Issues Report on State Budget Effects of Recent COVID-19 Federal Actions

This week, the Legislative Analyst’s Office (LAO) published a post detailing impacts on California’s state budget in light of COVID-19 and new federal resources that may assist in addressing state budget issues as a result of responding to the pandemic. The LAO examines sources of a potential budget problem where the state’s anticipated General Fund revenues are less than the General Fund costs to maintain state services. The state will likely be facing a budget problem upon the Governor’s release of his May Revision, as a result of three major COVID-19-related sources:

• Higher Direct Costs to Respond to the Public Health Emergency: The state has already incurred significant costs in responding to the COVID-19 emergency. Examples of these expenses include leasing medical centers to expand the state’s hospital and laboratory capacity, purchasing and refurbishing of medical supplies, and providing testing and treatment services to COVID-19 patients.
• Higher Indirect Costs as a Result of Changes in the Economy: The state will incur higher indirect costs from changes in the state’s economic circumstances resulting from the COVID-19 emergency. As unemployment rises and incomes fall, more residents will qualify for means-tested programs, including food assistance. In previous recessions, these types of costs have risen by low billions of dollars.
• Lower Revenues as a Result of Changes in the Economy: The largest budgetary impact of the COVID-19 emergency is likely to arise as a result of lower revenues. The length and severity of the public health emergency will drive the severity of the economic disruption and the ensuing revenue implications.

The LAO examines a series of recent federal legislative actions that has directed funding to states, local governments, and other entities to respond to the COVID-19 emergency. These federal legislative actions include the Coronavirus Preparedness and Response Act, the Families First Coronavirus Response Act (FFCRA), and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The LAO provides a detailed analysis of these funding sources and its impact on state and local budgets, as well as on key areas such as health care, unemployment, and education.

Ultimately, the LAO determines the various recent actions by the federal government will mitigate some of the adverse budgetary impacts caused by COVID-19. However, only a small portion of the federal funding allocated to date—additional Medi-Cal funding—will assist the state with the most significant source of budgetary strain that is likely to result from COVID-19: lower revenues. According to the LAO, additional federal action to support the economic and revenue consequences of this emergency could be warranted.

The full LAO post is available here.