California’s road to recovery runs through D.C. Republicans

OAKLAND — California has come to a conclusion around its budget in the pandemic era: Only the feds can save us now.

Gov. Gavin Newsom and his financial advisers have long warned that the federal government must assert its deficit spending powers to fill an enormous fiscal shortfall after the coronavirus paralyzed the economy. That message became louder on Thursday after Newsom projected a massive $54 billion gap this fiscal year.

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“We’ll get through this,” Newsom said, but “my optimism is conditioned on this: more federal support.”

Unlike the federal government, California cannot run budget deficits, and Newsom noted that despite California boasting one of the world’s largest economies, “one thing we don’t have as a nation state is that printing press.“ Democratic legislative leaders were on the same page.

Republicans in Sacramento have long been relegated to budget irrelevancy given Democrats’ control of both houses of the Legislature. But the reliance on Washington to avert a financial catastrophe could yoke California’s fortunes to Republicans, including President Donald Trump and Senate Majority Leader Mitch McConnell, who wield control over federal aid.

McConnell has previously suggested that states and local governments should fall back on bankruptcy, prompting Newsom to demand an apology, and has said aid should be linked to liability relief for businesses. And Trump has repeatedly suggested a partisan litmus test for federal help, saying “mismanaged” blue states are the ones that need help.

Newsom pushed back on that accusation on Thursday, stressing that economic ravages were a result of Covid-19 and “not mismanagement” as he implored the federal government for help.

California will have a powerful ally on Capitol Hill: House Speaker Nancy Pelosi, whom Newsom lauded for recognizing the need to aid beleaguered states. But Pelosi has repeatedly clashed with Republican leaders over the needed scope of federal help, increasing the odds that aid gets tied up in a partisan stalemate.

Pelosi and her lieutenants are working to assemble a multitrillion-dollar relief package that would include $1 trillion for reeling states. But in a sign of continued crosscurrents, Pelosi on Thursday rebuked Republicans for seeking a capital gains tax cut.

“A discussion about tax policy, save that for another day,” Pelosi said in an interview with Bloomberg.

Chris Hoene, executive director of the California Budget & Policy Center, said in an interview that it “was hard to conceive” how California could manage its budget woes without some federal help. Hoene predicted that the attention-grabbing size of California’s budget hole will both galvanize attention and foretell national pain that will compel leaders from other states to act.

“I think what California’s estimates today are going to trigger will be more attention to states overall,” Hoene said, and as more states publish dire fiscal estimates, “that’s going to put pressure on political leaders of all walks to help the communities they represent.”

Still, Hoene said it is possible that Republicans “try to do some things to restrict eligibility for benefits,” such as tying them to immigration status. “If the federal government tries to provide this aid in the way where they can control some of the levers that could become problematic,” Hoene said.

Business groups are lobbying for their own federal aid package to allay their coronavirus concerns. Top of the list are curbing liability and ensuring money helps to replenish an unemployment insurance fund that could otherwise be restocked by federal loans repaid by employers, said John Kabateck, California director for the National Federation of Independent Business.

“We’re very worried about increased liability so we will no doubt be looking for a way to address that,“ Kabateck said. “We would like to make sure liability is a top priority in any discussions between state and federal officials.”

It remains to be seen how accurate the $54 billion deficit projection is. The amount represents nearly 37 percent of California’s general fund budget, the largest shortfall since the Great Recession. But revenue forecasting in a pandemic is fraught with challenges given that so much depends on the course of infection and how elected leaders respond.

In fact, the nonpartisan Legislative Analyst’s Office on Friday released a significantly lower deficit projection using a different methodology that assumes California will keep current service levels intact, not the more ambitious spending that Newsom proposed in January. The Analyst said California’s deficit would instead fall between $18 billion and $31 billion.

Newsom released his deficit figure a week ahead of his scheduled May budget revision, an rare prelude that serves to prime residents for a more austere spending plan. But it was also clear within minutes that the attention-grabbing amount would become a key part of California’s lobbying effort in Washington.

Interest groups began lining up behind the message that the federal government must help avert painful cuts.

SEIU California amplified Newsom’s plea for a $1 trillion federal bailout, warning in a statement against recreating the Great Recession cascade in which “pullback in public investment accelerated the economy’s downward spiral.” The California Teachers Association, one of Sacramento’s most powerful interest groups and whose members have much to lose from plunging state revenue, called for a $1 trillion package with $175 million for schools.

“There is no solution that does not involve aid from the federal government combined with generating more state revenues,” CTA President E. Toby Boyd said in a statement.

Similarly, the Consumer Attorneys of California President Micha Star Liberty warned that without a federal infusion to stabilize court operations, “the fiscal malaise will almost certainly outlast the viral threat.”

A plateauing infection rate has California on the verge of a phased reopening of the economy, with formerly idle manufacturing and curbside retail poised to recommence as early as Friday. Under a framework Newsom had already released, businesses would need to have adequate employee safeguards in place.

But Newsom seems more cautious than other governors to reopen the economy on a wide scale, a position that will face increasing pressure in coming weeks as unemployment and budget cuts come to bear.

Source: politico.com
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