Federal dollars keep California ‘swimming in money’

California Governor Gavin Newsom’s latest budget proposal released last week suggests, as one article summarized, the state is currently “swimming in money,” including “a $15 billion one-time surplus.” That’s a massive turnaround from early in the coronavirus crisis, when headlines warned California faced “a staggering $54 billion budget deficit due to economic devastation from coronavirus.”  

A November review by California’s nonpartisan Legislative Analyst’s Office found several reasons for the state’s surging surpluses: 

  • Californians paid more taxes than officials
    projected.
  • Unemployment did not get as bad as predicted.
  • Fewer people than the state budgeted for
    sought government-funded health care and food assistance.
  • The California-based tech industry is doing
    very well during the pandemic, contributing to a strong stock market. 

The governor’s budget spotlights that a key reason for lower-than-anticipated state spending on those in need is last year’s unprecedented flood of federal benefits paid in the state:

One of the main reasons this recession was less severe than anticipated was the unprecedented level of federal assistance provided, including direct payments to many households, loans and grants for businesses to help them keep workers employed, and enhanced unemployment benefits. In fact, personal income in 2020 is expected to grow by 4.9 percent, due largely to more than $150 billion in additional transfers in the form of stimulus checks and unemployment insurance.

Consider spending on unemployment benefits, which shows the vast majority of California’s recent record unemployment benefit payments has been supported by federal funds. As the state’s Employment Development Department (EDD) notes, a total of $112 billion in unemployment benefits were paid between March 7, 2020 and January 2, 2021, including an apparent $60 billion under the state unemployment insurance (UI) program. But the fine print indicates that California’s so-called “regular UI” spending “[i]ncludes $600 federal stimulus payments the EDD added to each week of regular UI…from March 29, 2020 to July 31, 2020.” Meanwhile, data reported by the Department of Labor suggest spending on state UI benefits was closer to just $25 billion in March through December.

But even that overstates actual state funding. It ignores the fact that California has taken out $18 billion in federal loans to continue making good on state UI benefit promises since its unemployment trust fund was drained early in the crisis. (Federal loans must be repaid in the future by higher state or federal payroll taxes on jobs.) In the end, perhaps as little as $7 billion — just 6 percent — of the $112 billion in unemployment benefit spending in California since the crisis began has been supported by state funds, with the rest coming from federal funds. As the title of a January 8 EDD press release (“More federally extended benefits rolling out in California”) highlights without a hint of irony, the latest federal relief legislation will only continue that trend.

Just one example of how California and other states take advantage of federal funding is on display in the Extended Benefits program, which assists long-term unemployed individuals in states with high unemployment. California is one of a number of states that have adopted “triggers” that turn on full benefits in the state when that program is fully supported by federal funds as it is now, but lesser or no benefits whenever the state is expected to contribute half of benefit costs.    

What if that and other recent extraordinary federal unemployment benefit policies were curtailed? California anticipated that possibility prior to the potential expiration of temporary federal benefit programs in late December:

The EDD understands the loss of federal unemployment benefits can be critical to families relying on this support during the unprecedented impacts of this COVID-19 pandemic. The State of California has helpful resources for basic needs, food assistance, medical care or health care, housing and utilities assistance, among many others.

But for now, such helpful state resources will continue to be sought by “fewer people than the state budgeted for” since federal unemployment benefits were extended into 2021 and indeed enhanced by revived $300-per-week supplements. Which means California’s budget will continue swimming in federal money into 2021 as well.

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