Florida faces $5.4 billion deficit. Governor says addressing shortfall can wait

Wearing masks and keeping their distance, Florida’s top economists met Friday to prepare the state’s first post-pandemic revenue estimate, and the conclusion was breathtaking: Florida faces a $5.4 billion budget deficit over the next two years.

The massive number, although just a fraction of the state’s $92.2 billion budget, is the largest gap between revenue forecasts in state history, and will be painful to fill during what economists called, “a pandemic-induced economic contraction.”

The deficit — a 5.7% drop in expectations from the January forecast on which the budget was built — was hardly a surprise. Revenue had already dropped $1.9 billion for the fiscal year ending in 2019-20, and forecasters on Friday concluded that revenue will drop another $3.4 billion below expectations before the end of this fiscal year next June. They expect another $2 billion below estimates in the 2021-22 budget year.

“Every sector of the Florida economy in the U.S. and world economies has been affected by government’s responses to the spread of the coronavirus,’’ said Vesselka McAlarney, forecaster with Florida’s Office of Economic and Demographic Research who offered the analysis.

The continued spread of the coronavirus, the nation’s record high unemployment, the disruption to the supply chains, and government restrictions will continue to “have negative repercussions” in the months ahead, she said.

Because the state cannot finish its budget year with a deficit, the grim news will likely trigger a special legislative session to rewrite the state’s budget — which was passed in March by a Legislature aware of the pandemic but unwilling to modify its spending plan.

With a presidential election looming, Florida’s Republican governor and Republican-led legislative leadership have made a calculated decision not to address the budget shortfall before Nov. 3, avoiding a difficult debate that could amplify the state’s uncertain economy as voters go to the polls.

“Certainly, we’ll be able to get to the end of the calendar year without doing any type of special session,’’ said Gov. Ron DeSantis in Sarasota Friday, at a roundtable he held to discuss pandemic-related mental health issues.

But because the Florida Constitution prohibits the state from operating in a deficit, lawmakers will have to revise the budget to plug the holes, cutting millions from existing programs.

That could mean that millions are likely to be cut from safety net programs, even as people who have lost jobs and health insurance seek more state and federal services.

The economic shock will also lead to increased costs, the forecasters said. Homeowners insurance rates are expected to go up at least 10% this year, particularly in South Florida and coastal areas, and they estimate increases in automobile insurance.

In June, the governor vetoed $1 billion in projects when he signed the budget but left $500 million in new teacher pay raises, $625 million for the Everglades and other water-related projects and $100 million for the Florida Forever conservation program. He also approved 3% raises for state workers.

Using state reserves

Sen. Wilton Simpson, a Trilby businessman who will become the next Senate president after the November election, said the legislative budget commission can meet to make changes to the budget using the $4 billion in reserves so that legislators can avoid coming back for a special session this year.

“We will continue to monitor those things and by November or December if it appears we need to take action we could take action to rectify the situation,’’ he said. “But the more we can push off, the better decisions we can make.”

Economists noted that while the federal government has given Florida $5.8 billion in CARES Act funds, questions remain about how that money can be spent to replace lost state revenues, and whether another round of money will be approved.

“Unlike other states, Florida lacks a clear plan for dealing with the economic fallout from this pandemic, and we’re seeing this with the way the state budget is being dealt with,’’ said Sadaf Knight, CEO of the Florida Policy Institute, a progressive watchdog group. “The lack of a clear plan includes not advocating for additional funds at the federal level.”

Florida economists said the primary cause for the expected revenue drop in 2020-21 is a $2.84 billion drop in sales tax, which is expected to decline another $1.25 billion in the 2021-22 budget year.

At least half of the shortfall in sales tax has been caused by the decline in tourism — now at 11% below expectations — economists said, which means a steady drop in the state’s tourist-based revenues from rental cars to sales tax. The impact on sales tax has been an $890.5 million drop so far, forecasters said.

Also down are automobile sales, which were projected to be $191 million higher when the state budget was written in March.

The only area where sales tax revenues rose is in building investment, which is up $65.6 million.

Propping up business and consumer finances, McAlarney said, was the “decisive and swift federal income support and stimulus measures” which have served to stimulate the consumer spending that is keeping Florida and the U.S. economy afloat.

Federal unemployment payments have injected nearly $11 billion into the hands of out-of-work Floridians since April. Nearly all of that money arrived in the form of $600-per-week checks approved by Congress that provided a critical boost on top of the state’s meager benefits, which top out at $275 per week.

Those $600 payments ran out last month, and Congress has not approved a plan to replace them. DeSantis is looking to borrow money from the U.S. Department of Labor to increase the state’s benefits but has not said how much he wants to increase those benefits.

Digging into the details

Economists sorted through every area of state revenue, from healthcare and insurance premiums to criminal justice fines and fees and corporation income taxes.

They concluded that Floridians should brace for a rough recovery. They expect people to have less disposable income, buying fewer cars and spending less time driving, so driving fines and fees — as well as other penalties — are down.

As unemployment has soared to record levels, demands on state services have also mounted.

“This is one of the most difficult forecasts we’ve ever had to produce,’’ said Bob McKee, chief economist for the Department of Revenue. He said the loss in tourism is having an impact on many other sectors.

Amy Baker, director of Economic and Demographic Research, said the situation is nearly impossible for the traditional economic models to predict.

The state’s normal 4% growth in economic activity is not going to return until at least 2022, the forecasters said, and tourism will see the slowest return.

“When you look at the literature on epidemics and pandemics, other than tourism, when you have a cure or a vaccine it snaps back,’’ Baker said.

Baker cautioned against counting on small businesses to repay much of the $50 million the governor allocated in emergency bridge loans to 959 businesses during the state’s lock down. Only about $1.1 million has been repaid by businesses and, while many businesses are “hopeful that their small business gets back to a place where they repay the state,’’ Baker said many of those businesses have declined.

“We have no history on this kind of loan,’’ she said. “It’s a bridge to nowhere.”

Baker noted that the pandemic also has boosted the savings rate among Floridians, which went from 7.9% to 33.5% in April and down to 19% in June, all of which was unprecedented.

But she estimates that also means an estimated $700 million in consumer spending was “locked out of the economy” and it is hard to know when consumers will start spending it.

Tampa Bay Times staff writer Lawrence Mower and Miami Herald staff writer Samantha Gross contributed to this report.

Mary Ellen Klas can be reached at meklas@miamiherald.com