California is facing significant costs related to the immediate public health response to the COVID-19 crisis. In addition, the state will likely spend more on services such as health care and cash assistance for Californians whose incomes have fallen sharply in the wake of the statewide stay-at-home order. At the same time, the state’s primary revenue sources – income taxes and sales taxes – will be lower than anticipated due to increased unemployment, stock market declines, and reduced consumer purchases. These factors – higher spending and lower revenues – have put the state on the cusp of a substantial budget shortfall.
California is in a much better position to address a budget gap compared to previous recessions because state policymakers prudently set aside billions of dollars for a rainy day. These reserve funds will help to soften the impact of the COVID-19 crisis on the state budget. However, these funds – which total nearly $18 billion as of April 2020 – may be used up quickly depending on the severity and duration of the recession and the extent to which the state receives federal fiscal relief. This Issue Brief describes California’s state budget reserves and explains how the funds can be accessed and used to help support key public systems and services during the uncertain economic times that lie ahead.