California is now in a recession that could last years, state fiscal experts say

The coronavirus has officially launched California into a recession, and a potentially severe one that could last for several budget cycles, state lawmakers and financial experts say.

“We are embarking on difficult fiscal times,” said Sen. Holly Mitchell, an L.A. Democrat and chair of the Senate Special Budget Subcommittee on COVID-19 Response.

Mitchell said California enters the economic downturn in a better position than during the Great Recession, which left the state with a $60 billion deficit and a slashed budget.

“If we had experienced this abrupt economic downturn a decade ago,” Mitchell said, “we would already be out of cash and forced into expensive external borrowing, immediate budget cuts and perhaps been issuing warrants instead of paychecks.”

But, she added, that preparation “will most likely not insulate us from economic harm coming our way.”

Legislative Analyst Gabe Petek said it’s unclear how long the economic devastation will last, but proposed three scenarios for how California could emerge from the recession.

The first offers an “optimistic” view that economic activity will remain “depressed” until the threat of the coronavirus subsides, and stay-at-home orders are lifted. This best-case scenario would likely happen later this year or early next.

The second scenario presents a more “sluggish” reversal of economic inactivity, Petek said. That’s when restrictions remain in place longer due to prolonged worry over the coronavirus and businesses have to stay shuttered through this prolonged period.

The third more dire, worst-case model suggests the virus dissipates this summer, restrictions lift, the virus returns later this year and stay-at-home orders resume through another cycle of the pandemic.

“We don’t know how deep the downturn will be, how long it will last or the shape of the recovery will look like,” Petek said. “The economic outcome depends on evolution of virus itself.”

Brick-and-mortar businesses, restaurants and bars, retail and travel industries are among those heavily hit by this pandemic and will experience more long-lasting economic devastation, he said.

Both Mitchell and Petek said the federal government will play an integral role in assisting California and other states in economic recovery.

During the Great Recession, unemployment peaked at a little more than 12 percent, said Vivek Viswanathan with the state Department of Finance.

“The unemployment rate in this crisis could go higher than even that,” Viswanathan said. Even with a “budgetary cushion” of more than $17 billion in reserves earlier this year, “difficult decisions lie ahead.”

It will take several months to get a clear picture of the budget situation. The Legislature is therefore considering what’s called a baseline budget, or a continuation of last year’s spending, until there’s more understanding of California’s fiscal standing.

The Legislature voted to recess on March 16 to honor stay-at-home orders, and authorized with their decision the chance to work remotely. Before they adjourned, both houses unanimously approved “broad authority” for Gov. Gavin Newsom to use $1.1 billion in emergency funds to finance executive orders during the coronavirus.

Since then, Newsom has signed a slew of orders that authorize millions each to help, among others, businesses, undocumented immigrants, foster youth and grocery workers.

But the Legislature, a co-equal branch of government in theory, has had little to no say in how that money is spent or with what companies the state is contracting to produce protective personal equipment and other resources.

“Large contracts are being lent. We don’t know what they’re all about,” said Sen. Jim Nielsen, R-Tehama. “Monies are being obligated and our budget is also being affected and obligated. That’s why this oversight is even more important.”

Thursday’s hearing was the first live-streamed legislative hearing in a month, and there were plenty of bumps. Members of the public and media were asked to watch the meeting on the Senate’s website. Before the hearing could begin, the site crashed.

Mitchell said at the start of the hearing that 10,000 people tried to live-stream the hearing, which overwhelmed the site.

Mitchell and Nielsen were the only two senators who physically attended the meeting. Senators Anna Caballero, Brian Dahle, John Moorlach, Richard Pan, Richard Roth and Nancy Skinner participated via Zoom, along with representatives from the Legislative Analyst’s Office, the Department of Finance and the California Budget and Policy Center.

This story was originally published April 16, 2020 at 4:11 PM with the headline "California is now in a recession that could last years, state fiscal experts say."