The economy of California is equal to that of France yet the state faces a $54.3 billion deficit as it gets pounded by the coronavirus pandemic.
New York’s budget deficit skyrocketed from $6 billion to $13 billion while it was the epicenter of the coronavirus pandemic.
However, many argue that it’s not only the virus that is to blame.
Here are 10 things to know about why seemingly rich Democrat states California And New York are broke.
The economy of California is the largest in the U.S, with a $3.2 trillion gross state product as of 2019. If California was an independent country in 2019, it would have ranked as the world’s fifth-largest economy after Germany and ahead of India.
Forecasters believe California’s big three tax sources — personal income, sales and corporations — will fall about 25 percent, representing a projected $41.2 billion revenue decline over the next 14 months, Politico reported in May. Gov. Gavin Newsom predicted that the national unemployment rate will soar to “Depression-era numbers.”
“We’ve never experienced anything like this in our lifetime,” Newsom said.
Every U.S. state and municipal budget will take a big hit because of the coronavirus but none so much as California, City Journal reported. Its $54 billion shortfall beginning July 1 is the largest deficit a state has ever accumulated. Gov. Gavin Newsom said the deficit was “a direct result of Covid-19.”
“That’s clearly not true,” wrote Steven Malanga, senior editor of City Journal, a publication of the Manhattan Institute for Policy Research free-market think tank.
“Critics have long warned that the state’s tax base is volatile, being increasingly reliant on wealthy residents and vulnerable to sharp contraction in the next recession. Combine that with California’s spending spree—including expenditures to fix problems that the state’s own bad policies have worsened—and the swing from prosperity to penury isn’t hard to understand.”
New York’s gross state product in 2018 was $1.7 trillion, ranking third after California and Texas. If New York State was an independent country, it would have ranked as the 10th largest economy in the world. Its gross domestic product was comparable to Canada and South Korea, Business Insider reported in April 2019.
By November 2019, New York faced budget deficits between $6 billion and $8 billion over the next three years amid ballooning costs for Medicaid, Democrat & Chronicle reported.
A third of New Yorkers were on Medicaid at the time.
Budget documents released in November showed the state was facing its worst fiscal problems since its $10-billion budget gap in 2010.
The main culprit was exploding Medicaid costs. Under Cuomo, the state was able to keep spending growth to about 3-or-4 percent a year since 2011.
A $6 billion budget gap for the 2020-21 fiscal year could mean deep cuts in programs and services.
The state’s budget update in November showed deficits of $2.9 billion growing to $3.9 billion by 2023 in New York’s $70 billion Medicaid program. That was before the coronavirus outbreak.
The state Legislature and Cuomo have until April 1, when the next fiscal year starts, to come up with a balanced budget.
New York Gov. Andrew Cuomo’s budget office estimated in September 2020 that the state’s deficit had grown to $14.5 billion.
The governor temporarily held back 20 percent in aid payments to schools, local governments and others, under emergency powers granted to him by the State Legislature, NPR reported.
Cuomo is waiting for a fifth stimulus package that includes aid for cash-strapped state and local governments, but that still hasn’t happened, said E.J. McMahon with the conservative-leaning fiscal watchdog group the Empire Center. “This was a high-stakes gamble, and it’s coming up snake eyes,” McMahon said.
Across New York, nearly 20,000 highly compensated local, city and state employees out-earned Gov. Cuomo’s $178,500 salary, Forbes reported in May.
Auditors at OpentheBooks.com found Port Authority police of New York-New Jersey earning $423,467, Long Island school superintendents making up to $547,049 and a 93-year old college professor retired on a $561,754 pension.
“Only in New York can school janitors out-earn the principals,” Forbes reported. “We found 40 ‘custodial engineers’ who earned between $154,000 and $256,000, while 57 principals made less than $154,000.”
In total, $38 billion in compensation went to local and state government workers across New York who earned six figures, not including benefits.
That also did not include payroll costs of at least 12,373 federal employees making $100,000+ in New york executive agencies.
“New York, like many states with excessive pay and pension costs, intends to rely on a U.S. taxpayer bailout to see them through their fiscal woes,” wrote Adam Andrzejewski, CEO and founder of OpenTheBooks.com.
Two weeks before the New York coronavirus outbreak reached its peak in April 2020, Gov. Cuomo said a bidding war between states and FEMA — the Federal Emergency Management Agency — spiked ventilator prices up to $25,000 per unit.
“You now literally have a company calling you up and literally saying, ‘well California just outbid you,'” Cuomo said, according to a Patch report. “It’s like being on eBay.”
During the covid-19 apex, New York expected that it would need as many as 40,000 ventilators. It ordered 17,000.
“We are paying $25,000 per ventilator and we are broke,” Cuomo said.
New York has had double the number of coronavirus deaths of any other U.S. state — 33,356 — according to Worldometers. Texas, California new Jersey and Florida rank No. 2 thru No. 5 for covid-19 deaths. California has had the most cases — 842,150. New York by comparison has had 503,290 cases and ranks fourth for cases.
At least eight months before the coronavirus outbreak, California had a low ranking on the U.S. News Fiscal Stability Rankings at No. 42.
New York ranked No. 26.
“Effective state administration and fiscal health have become increasingly important, as some have achieved economic status equivalent to foreign powers. For example, the economy of California is equal to that of France,” US News reported.
Tennessee ranked No. one for fiscal stability, followed by Florida, South Dakota, North Carolina and Utah.
The fiscal stability of a state’s government can determine the success of government-sponsored programs and projects and the quality of life of its resident.
It was not the U.S. Constitution that enumerated the basic rights of Americans but the Bill of Rights. The Constitution’s 10th Amendment reserved an unspecified array of rights for the states: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”
The fiscal stability rankings are based on states’ budget balancing and liquidity, government credit ratings and pension fund liability, according to U.S. News.
California’s 13.3 percent personal income-tax rate is the highest of any state and is considered the model of progressive fiscal policy, according to City Journal. Capital-gains income is another significant source of revenue. In 2017, Californians reported $142 billion in capital gains, by far the most of any state. Two-thirds of that came from people making more than $1 million.
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The top 1 percent of California earners now account for about 23 percent of the state’s adjusted gross income but pay 46 percent of the income tax—nearly $50 billion last year — all from an estimated 15,000 households.
Before the coronavirus recession hit, the state projected that more than 70 percent of its general fund revenues—$102 billion—would come from personal income taxes. The problem is that the income of the wealthy is highly variable, based heavily on dividends, capital gains, and bonuses, which mostly evaporate in recessions.
Demand for health and human services programs are expected to add $7.1 billion to California’s costs, according to its Finance Department. California can expect to spend $6 billion on other new expenditures, most related to the coronavirus response, Politico reported.
County leaders across New York are calling for marijuana legalization to address budget shortfalls caused by the coronavirus pandemic.
States have generally loosened their marijuana laws, but it’s still a crime to sell, grow, or possess cannabis in New York. Cuomo has pushed for legalization but lawmakers have yet to reach consensus on the issue.
Assembly Majority Leader Crystal Peoples-Stokes (D) said that she hoped to achieve legalization this year, Marijuana Moment reported.
The New York State Association of Counties (NYSAC) said that adult-use cannabis legalization “will provide the state and counties with resources for public health education and technical assistance.”
