With a projected $41 billion drop in tax revenue and an unemployment rate that could soar to 18%, California — once flush with cash in its $22 billion rainy-day fund — will be far less golden thanks to the Covid-19 pandemic.

By Nick Cahill and Bianca Bruno

SACRAMENTO (CN) — With millions already jobless, California’s pandemic-induced recession is on pace to shatter previous downturns and could lead to a record $54 billion budget shortfall, state officials warned Thursday.

The California Department of Finance said it expects the state’s main revenue sources to decline by more than $41 billion compared to January predictions. The vanishing income, sales and corporate taxes — combined with an estimated 18% unemployment rate — reflect the disastrous economic toll already caused by the novel coronavirus.

“The Covid-19 pandemic has caused enormous hardship for families, businesses and governments across the world, the United States and California. It has endangered health, stressed the health care system, and caused devastating losses in family and business income,” the department states in a grim 4-page report, which can be viewed below:

[Open .pdf in new window]

“Covid-19 has caused a national recession, a precipitous decline in income, rapidly rising health and human services caseloads and substantial Covid-19 driven costs.”

The report comes one week before Governor Gavin Newsom is required to give lawmakers an updated budget for 2020-21 fiscal year. Unlike the ambitious $222 billion version released in January, which was banking on a $5.6 billion surplus, the so-called “May Revise” will contain wholesale cuts and a lack of new spending programs.

According to Thursday’s memo, California schools could be the biggest loser: if tax revenues don’t quickly rebound, general funding for K-12 schools and community colleges could see a $18 billion hit.

California’s general fund relies largely on three revenue sources — personal income tax, sales and use tax, and corporation tax. Newsom’s advisers now predict tax revenues will plunge a combined $41 billion compared to the figure used to craft the January budget, not to mention the $6 billion the state plans to spend this year fighting the pandemic.

The report also expects the middle and lower class to be specifically harmed, as many layoffs have occurred in low-wage industries.

Over 4 million have already filed for unemployment, but the Newsom administration is planning for 2020 unemployment levels to surpass the Great Recession peak of 12.3% and top out at 18%. Furthermore, personal income could plunge by 9% and permits for new housing, a key economic indicator, could drop by over 20% this year.

“The May revision forecast projects that the impact of these economic losses will be disproportionately borne by low- and middle-income Californians. This is particularly concerning as state median income did not return to the pre-Great Recession level until 2018,” the report continues.

The predictions are incredibly jarring and unprecedented, but Newsom’s advisers note the projected deficit as a percent of the general fund budget is slightly smaller than budgets pieced together in 2003 and 2009.

This is a developing story.