California needs a more ambitious recovery plan

While the news is full of optimism about vaccines, unexpectedly stable state revenues, and long-overdue federal stimulus, there are several looming risks to California’s recovery. The past year has revealed the dangers inherent in an under-resourced public sector. After decades of underfunding public health, vaccination rollout and PPE distribution staggered under logistical challenges, further prolonging the pandemic’s damage. California’s poorly funded schools have struggled to manage the costs of preparing for reopening, getting technology to students, and retaining staff to support students. As in many states, California’s unemployment insurance (UI) system has struggled to get billions of dollars to out-of-work Californians. Hospitals and schools face staffing shortages that will only get worse.

As the legislature and Governor negotiate the 2021-22 budget, they need to meet several challenges:

• Local governments need help: California’s local governments are in crisis. California lost more than 160,000 local government jobs in the first three months of the pandemic—nearly 170,000 as of December (compared to 142,000 at the lowest point after 2008). In May 2020 we noted that the impact of shelter-in-place orders on sales and tourism taxes made cities particularly vulnerable to revenue losses. We are also seeing property values fall—in some places significantly, particularly for commercial properties—which will hit local budgets in the upcoming fiscal year. Local governments employ more than three times as many people as the state—nearly 70% of public sector workers in California—and provide vital services, including transportation, public safety, public health, homeless outreach, and schools. Local governments fund the vast majority of infrastructure projects: roads, buildings, bridges, and transportation projects that generate thousands of jobs and millions in private sector spending. The Governor’s proposed economic recovery provides no direct funding for cities and counties.
• Pandemic impacts have been incredibly unequal: We are already experiencing a “k-shaped” recovery, in which those at the top recover quickly while those at the bottom continue to struggle. In fact, wealthier Californians have been generally unaffected by job and income losses (which partially explains why the state’s revenue picture is so much better than forecasted). Job loss has been heavily concentrated among low-wage workers. Almost 85% of Black workers in California have filed for unemployment; unemployment claims are also concentrated in high-poverty areas. Unemployment for women has been higher throughout the pandemic. Health risks are also unequally distributed: women and people of color are disproportionately working in jobs that require close proximity to others and must be performed in person. The unequal distribution of income and wealth posed a social and economic crisis before the pandemic, and will only worsen in the absence of strong public spending that helps close the gap between low-income Californians and economic security.
• Californians have accumulated mounting debts: The Federal Reserve estimates that U.S. renters owe $1.6 trillion in unpaid rent over the course of the pandemic; estimates for that amount in California range from $400 million to $3.6 billion. Suspension of student loan payments, recently extended through September 30, 2020, have prevented defaults but without significant federal student loan relief the resumption of those payments—and the accumulation of interest—will set borrowers back and suppress consumer spending.
• California’s education and health care sectors are significantly under-resourced: The pandemic has exposed the fragility of sectors that are central to economic opportunity and security: child care, education, and health. The challenges facing public school districts and child care providers—in reopening safely, recruiting and retaining staff, supporting the neediest students, and addressing equity gaps—have been existentially threatened by the pandemic. The weaknesses in our health care system and coverage have led to overwhelmed health care workers and devastating health outcomes. We discuss these challenges in more detail below.
• California’s infrastructure is not up to the challenge of our future: The past several wildfire seasons have driven home the risk that climate change poses to California’s future. We have not yet made the public investments necessary to support California’s adaptation to a drier, hotter climate. Investments in alternative energy sources—including the workforce to manage them—and in mitigation strategies—such as fire prevention, sustainable housing development, and wetland restoration—cannot wait.

We cannot afford to repeat the mistakes of the Great Recession

California entered the pandemic in better fiscal shape than before the Great Recession; in 2019 the state had sufficient reserves to weather a mild recession. In January 2020, in anticipation of continual revenue and economic growth, Governor Newsom proposed a $153 billion budget that increased both one-time and ongoing spending on education, housing, and health care, new programs to combat homelessness, and desperately-needed education funding. Then the pandemic hit.

When the impacts of the pandemic began to hit in spring 2020, the Governor’s May Revision became a “workload budget”: it froze most spending at 2019-20 levels, with few exceptions for COVID-related spending. The state ultimately adopted an austerity budget with only $133 billion in general fund spending. The budget made severe cuts to both K-12 and higher education, deferred an  important expansion of Medi-Cal, and eliminated proposed spending on housing and infrastructure.

It now turns out that the 2020-21 revenue projections were overly pessimistic. The adopted budget projected that revenues would drop by nearly $15 billion from 2019-20. Instead, revenues are on track to exceed 2019-20 revenues, nearly matching the projected revenues in the Governor’s January 2020 proposal. The legislature has already restored some of the cuts made in 2020-21 effective July 2021, but these don’t address the scale of revenue loss and cost increases.

In December 2020, California officials estimated that this “windfall” could amount to $26 billion, driven by the wealth increases and stable employment of higher-income Californians. But despite the projected surplus for 2021-22, the budget forecasts deficits for the coming three years, through the 2024-25 fiscal year. The Governor also projects that state job losses will not return for half a decade; the Congressional Budget Office (CBO) projects the U.S. economy will not recover 2020 job losses until 2024. The Great Recession had its most severe fiscal impacts in the few years after it began. We need to be planning ahead to prevent long-term damage to our economy and to California families.

It’s important to emphasize that California is not enjoying a “windfall;” we are on track to match non-pandemic revenues for 2020-21, and projected to lose revenues after that. This is not the time to be complacent about the inadequacy of our revenue base for sustaining long-term recovery.

California was one of the most severely impacted states during the Great Recession. Credit ratings agencies flagged California cities as high risk for municipal bankruptcy. Like most states, California saw record job losses in the public sector, deteriorating levels of public infrastructure and services, and years of compromising on California’s commitment to an equitable economy. As we wrote in October, the state’s economy had barely recovered by 2019, and by many measures (job quality and public sector employment) the economy was more vulnerable in 2019 than in 2007.

Studies of the impacts of the Great Recession confirmed the importance of avoiding austerity measures to prevent long-term economic damage. Research from the Great Recession demonstrated that short-term labor markets have a stronger impact on long-term outcomes  than previously understood. An analysis of job recovery in 50 states from 2008-2013 found that states that cut their public-sector workforce had deeper job losses overall and in the private sector. EPI found in 2009 that for each dollar of budget cuts, more than 50% of the jobs and economic activity lost will be in the private sector.

In 2010, the Labor Center found that cuts of 261,000 jobs in health and human services would result in $21 billion in lost economic output, and $1.3 billion in state and local tax revenue. Close to 25% of the savings from those job cuts would be negated due to loss in economic activity.

n 2018 dollars, the loss of 100,000 state and local jobs matching the distribution of actual job losses from 2008-2013 have an economic multiplier effect of 1.51: that is, for every state or local job loss and additional .51 jobs are lost in the rest of the economy. This represents $10.4 billion in direct income loss, and more than $3 million in income loss induced by reduced consumer spending.

California has already seen significant public job loss

From February to December 2020, California lost more than 200,000 state and local government jobs, including nearly 170,000 local government jobs. The early fall recovery has clearly slowed; in December we had a net loss of private sector jobs—in both the U.S. and California—for the first time since April (Figure 2).

These losses come on the heels of years of declines in state and local employment. When compared to population growth, state and local employment was well below pre-Great Recession levels heading into 2020 (Figure 3). Since February, after a short lag in job loss, the share of California’s jobs in state and local government has continued the downward trend that began in 2008.

This gap represents lost teaching staff, school support staff, child protective services workers, preschool teachers, parolee counselors, public hospital nurses, transit operators, and many other jobs that form the foundation of economic mobility for Californians. Two areas of underinvestment have been starkly exposed over the past year: education and health care.

California must invest more in education and health

California significantly underinvests in education

Quality education from early childhood through high school graduation is not only a vehicle for individual opportunity and economic security, it is central to the economic resilience and innovation of our state. By any measure, California significantly underfunds education relative to other states. In 2020, Stanford researchers estimated that it would take $25.6 billion in additional funding to permit local districts to meet the state’s own educational goals.

Understanding the trends in per-pupil funding can be challenging, because many mandated costs for districts have risen much faster than inflation, requiring greater funding levels from the state just to maintain spending. For example, beginning in 2014, the annual percentage increases to state allocations have hovered around 1-2%, while just one mandated expense, contributions to CalSTERS, will double from 8.25% to 19.1% by 2023. Escalating expenses for special education have also far outpaced funding increases from the state—an estimated 20% in real dollars, which local districts have had to absorb.

California’s staffing levels also lag behind the nation: the number of students for each full-time equivalent teacher was 20.9 in 2007-08, before the Great Recession began. In 2017-18, the last year data is available, it was 21.1, after reaching a peak of more than 23 in 2010-11. Pupil-teacher ratios in California are now the highest in the nation; the national average is 16. In 2007, PPIC estimated that it would cost $15 billion annually for California to match staffing ratios in other states. This underinvestment is despite California’s higher needs population and could be driving California’ s lower educational outcomes. Nearly 20% of California students are English Language Learners, the highest in the nation (and nearly double the national rate of 10%). California’s high school graduation rate is 83%, below the national average.

The pandemic has further decimated California’s local education workforce. In November 2020, California had 888,600 people employed in local education, compared to more than 1,030,000 in November 2019, a drop of more than 140,000. This drop erases the slow increase in local education employment after the great recession; it took nine years for local education jobs to recover (Figure 4).

The state’s formula for funding education leaves districts facing uncertainty and issuing thousands of layoff notices every budget cycle. School districts are dependent on annual supplemental appropriations from the budget to sustain basic services, as Proposition 98 funding has fallen well behind what districts need just to meet state and federal mandates.

The Centers for Disease Control and National Education Association have estimated that schools will need billions to open safely and address the consequences of a year of interrupted and remote learning for students, beyond the PPE and supplies covered by federal relief funds. California’s share of these estimates would be $4.3 billion for smaller class sizes, $334 million for transportation, $471 million in technological support, and $297 million to resume before and after school care.

Increasing the Local Control Funding Formula (LCFF) base grant for school districts, making good on promises to improve facilities, fully funding transitional kindergarten and public preschool, and fully funding special education and other intervention services are central to California’s economic future. The Governor proposes to fund new initiatives on workforce development, but research shows that early childhood education, supports for students to graduate high school, and financial access to community colleges are foundational investments.

Inequities in access to health care persist

California has made substantial gains in expanding health coverage under the Affordable Care Act, but 3.5 million Californians lacked health insurance even before the pandemic and many Californians struggle to afford their insurance premiums and care, problems which are even more severe under a pandemic and recession. Latinos and low-income Californians disproportionately lack coverage and face health care affordability concerns. Adopting a system that provides health coverage to all Californians under a single program, as is being examined by the Healthy California for All Commission, would be the most comprehensive way to address these gaps. Before COVID, many California policymakers had already identified the need for near-term investments that would move us closer to achieving the goals of improving health care access and equity such as:

• Expanding Medi-Cal to all low-income adults regardless of immigration status with a General Fund investment of approximately$1.6 billion per year (estimated by Department of Finance in 2019, not including In Home Supportive Services costs), building on the state’s recent expansions of Medi-Cal to all low-income children and young adults under age 26, and addressing a major gap for the state’s largest group of uninsured individuals;
• Extending and/or expanding California’s program to make insurance through Covered California more affordable, with the details of possible state actions dependent on whether the federal American Rescue Plan bill includes the proposed temporary premium affordability improvements and eventually makes them permanent; and
• Improving access to care by achieving a diverse health care workforce that is aligned with the state’s health care needs, which was estimated by the California Future Health Workforce Commission to require $3 billion in state investment over 10 years.

Public health investment is insufficient

While plans for an effective COVID public health response are continually evolving, it is clear that substantial investment will continue to be required in the next budget year, and perhaps beyond. In the Governor’s January budget proposal, he proposed to spend over $820 million General Fund related testing and tracing and other public health responses and set aside $372 million as an initial investment in vaccine distribution which can be accessed immediately. The Governor intends to provide $1.2 billion from the December 2020 federal relief package to local health departments for testing, tracing, and vaccinations but it is not yet known how the remaining federal funds will be allocated. It remains to be seen whether the proposed funds will be sufficient for effectively addressing the spread of COVID.

The pandemic has highlighted the need for greater long-term investment in public health. California’s public health funding has eroded over the last decade—the 2020-21 public health budget was $3.2 billion, less than the $3.4 billion budgeted one decade earlier in 2010-11, even though the overall state funds in the budget grew by 61 percent between 2010-11 and 2020-21. California’s state and local public health workforce funding has fallen by 14 percent between 2010 and 2019. The pandemic has also shown the need for better planning and investment in the tools needed to respond to a public health emergency, such as Personal Protective Equipment (PPE). California enacted a law in September 2020 that requires development of a state PPE stockpile for health care workers and other essential workers in order to save lives and jobs and prevent the need to pay pandemic-level prices for PPE during the next public health emergency, however state funding is still needed to implement the law. Public health staffing and PPE are just two examples of the public health investment needed, and further planning is needed to determine the full set of investments required to be better prepared when the next public health emergency hits.

State spending is critical to California’s economic recovery

A strong public sector supports strong economic recovery. Budget cuts that put people out of work and constrain their incomes come with costs—induced job loss throughout the economy, lower tax revenues, and higher program costs. Cuts to public spending don’t just impact the workers who lose their jobs; they ripple throughout the economy. Public spending circulates through the economy as transfer payments (e.g., Medicaid benefits, food stamps, and TANF), grants, and contracts. Nearly a third of direct state spending supports jobs in the private sector.

Most public sector infrastructure projects are performed by private firms, who contract with the government and in turn hire subcontractors. The supplies made for those projects are also tied to private sector jobs. Thousands of California’s private sector workers are dependent on public funding, even if they aren’t aware of it. Many other public sector workers perform their jobs using supplies produced by the private sector: fire trucks, instructional materials, buses, and computers.

During a recession, public budget cuts can hamper economic recovery. State and local austerity—driven by balanced budget requirements, plummeting revenues, and increased demand for services—was particularly widespread after the Great Recession, and is particularly damaging given that 89% of California’s public sector jobs are in state and local government. Economists studying the Great Recession found that austerity was more damaging than previously thought, and that avoiding austerity was as important as stimulus measures.

How we can rebuild California better

Inadequate public investment now will cement the inequality in the labor market that has characterized both the past decade and the past year, and harm California’s long-term economic recovery. Addressing these challenges requires bold policies and more spending.

• Extend income support: California can do more to get money to people who are hardest to reach and have been most impacted—such as undocumented laid off workers, who have been left out of the federal stimulus. The $600 stimulus payment for low-income Californians signed February 23 is a good start. An overdue EITC expansion would help get more money circulating into the economy, creating jobs and preventing families from falling further behind, and distributing the tax burden more fairly.
• Invest in core public infrastructure: Make long-overdue investments in education (including early childhood education) and health, two sectors that form a core economic base and which enable Californians to realize their full potential. By several measures, California’s investments in education fall well below national averages, despite our high cost of living. California also needs to invest in administration and technology to ensure that programs intended to support Californians—such as unemployment insurance and CalFresh—do so effectively.
• Expand our revenue base: California must use the  immense wealth created here to provide a foundation for long-term economic resilience. Each year, California spends billions through credits, loopholes, and other tax reductions for businesses and individuals; the California Budget and Policy Center estimates that $60 billion in annual state tax expenditures go primarily to wealthy taxpayers and corporations. Economists have identified wealth taxation as a key strategy for addressing widening inequality and providing sufficient revenues for public goods.