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Coronavirus forecast: California tax collections to plummet by 20%

Fitch Ratings is sticking for now with the state’s “AA” rating it gave California in August.

One big California enterprise that is getting economically hammered by coronavirus is the state government itself.

Like peers around the globe, California’s government is spending furiously to battle the pandemic. At the same time, the resulting business shutdowns used to slow the spread of the virus is slashing tax collections.

Fitch Ratings, a major Wall Street credit grader, has come out with its first-glance look at how the state budget will fare in the stay-at-home/social distancing era that’s battered business climates around the planet.

Despite estimating that 1-in-5 tax dollars could be lost to the virus, Fitch is sticking, for now, with the state’s “AA” rating it gave the state in August. That’s the highest grade Fitch has on California since 2002. Only seven states have lower ratings.

However, this affirmation of that grade — with a “stable” outlook — didn’t come without a series of caveats that suggests there’s still plenty of risk with help (ahem, cash flows) that others will pay for. By the way, Fitch recently put “negative outlook” warnings on its ratings for New York and Alaska.

As Fitch put California’s plight: “Much remains unknown about the scale of the potential revenue impact and the state’s eventual response to it.”

Gov. Gavin Newsom’s revised state budget, due out next month, will provide an early clue at the government’s financial future. And remember, any reductions in state spending will further shrink California’s economy.

Fitch offers a glum guess at how deep cuts may be.

Using a dour global outlook of a short-but-strong recession, Fitch sees California’s tax revenues down 20% in a year and a 7.9% loss over three years.

That’s a steeper drop than the Great Recession’s budgetary damage. And that’s a bigger decline than most states: Fitch sees the typical state revenues down 11.3% in the first-year fall and a 2.7% three-year dip.

This worldwide economic calamity exposes California government’s unique finances: Its heavy bet on income taxes is now a bounty in serious doubt.

Winnings by Californians on Wall Street previously generated about one-sixth of the state’s income tax collections in the form of capital-gains taxes. The recent stock crash will likely smother trading profits. And Fitch notes capital-gains tax collections fell 78% in the Great Recession.

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On the plus side, Fitch says California has significant cash to fight the virus and stay afloat: $5.2 billion in the general fund balance and $16.5 billion in its “budget stabilization” or “rainy day” account. The state has put $1.3 billion of another emergency fund toward the pandemic battle.

And do not forget Proposition 98. This 1988 voter initiative will automatically cut a politically sensitive and large slice of state spending: education. That savings will aid the state’s own cash flow. However, this cut will only push the cost-of-schooling debate to local levels.

Plus, Fitch details piles of federal cash — “bailout” or “stimulus,” depending on your views — that may be coming to the state government thanks to recent moves in Washington, DC.

There’s direct help of $8.4 billion to the state government and $6.9 billion to local municipalities. Up to $4.46 billion to pay for increased Medicare payments. The Federal Reserve could lend California up to $39 billion. And Federal Emergency Management Agency reimbursements could total $7 billion, with $500 million already advanced.

All states face tricky budget challenges, but Fitch says “California’s exposure to economic and revenue cyclicality is among the highest of the states. Revenue expectations are likely to be sharply reduced by the economic slowdown and by continued stock volatility.”