California’s economic picture is unusually bright now. Unemployment is at multiyear lows and the state’s fiscal health is at historically high levels. But history tells us good times will not last forever. Sometime-and according to many forecasters, sometime soon-the nation and the state will go through a recession.
This report considers what a recession would mean for certain key programs within California’s social safety net-a vital set of programs that aim to protect the health and wellbeing of the state’s most vulnerable residents. Even in the best of times, millions of Californians depend on these programs. When the economy turns down, the need for assistance rises, sometimes substantially. Past downturns have hit state finances hard, forcing painful spending cuts. How then will California be able to balance its budget, as the state constitution requires, while maintaining support for those who need it?
It is helpful to look at the recent past in order to calibrate the difficulties that the state will likely face. California’s most recent downturn was the Great Recession of a decade ago, which came on the heels of the nation’s worst financial crisis since the Great Depression. During the Great Recession, the share of Californians who were poor grew from 12.2 percent to 16.6 percent, putting pressure on the state’s safety net. All told, the three large safety net programs registered $1.9 billion in cuts annually from 2008 to 2012, representing 15 percent of all cuts in state General Fund spending.
This history serves as a guide to what may lie ahead for the state’s safety net.
- Using past experience to project trends in the next recession, 500,000 to 1.2 million Californians could fall into poverty during a mild or moderate recession.
- Poverty rates remained elevated for several years after state revenue began to recover, underscoring the necessity of planning for the entire economic cycle, not just the period when the economy is contracting.
- Medi-Cal, the state’s Medicaid program and its single largest expenditure when all funds are considered, has expanded dramatically in recent years and now provides health care coverage for millions of low-income families and individuals. Ensuring that it continues to play this critical role while managing increasing health care costs will be a challenge.
It is inevitable that program cuts will have to be considered in a moderate-to-severe recession. Two principles can help to frame spending decisions: (1) Prioritize protecting the most vulnerable Californians-those who are harmed most in economic downturns and depend on multiple safety net programs for basic necessities. (2) Recognize the staggered timing of recessions, revenue shortfalls, and poverty, and aim to restore cuts when revenue is recovering but poverty is still high.
California has one tool in its kitbag that was not there a decade ago-more than $20 billion in reserves set aside to provide a cushion in a budget crisis. These reserves could make safety net cuts insignificant in a mild recession and soften the blow in a severe one.
One important unknown will be the role of the federal government in the next recession. Federal support protected California from far-larger safety net spending reductions during the Great Recession. Today, a contentious national political climate and a soaring federal budget deficit raise questions about the amount of help California will be able to count on when the economy turns down.