The black swan phenomenon: FL faces potential shortfall in state funding

Black swan (Cygnus atratus) flying above the surface of a lake. Credit: Richard Sharrocks/Getty Images

A black swan has descended on the 2020 Florida Legislature, causing lawmakers to extend their session beyond Friday’s deadline and to prepare for a potential shortfall in state funding.

The black swan phenomenon, first described by statistician Nassim Taleb, is a rare, hard-to-predict, high impact event beyond normal expectations.

The black swan confronting the Florida Legislature is the deadly coronavirus outbreak and its potential impact on the economy. The virus emerged recently in China, causing a respiratory disease that can be fatal and has expanded globally and domestically, including in Florida.

“Coronavirus is the black swan of 2020,” Sequoia Capital, a prominent Silicon Valley venture capital firm told its clients in a March 5 memorandum. “It will take considerable time – perhaps several quarters – before we can be confident that the virus has been contained. It will take even longer for the global economy to recover its footing.”

An economic slowdown will cause a drop in Florida’s tax collections in the coming budget year, which begins July 1.

House Speaker Jose Oliva, a Miami-Dade County Republican, and Senate President Bill Galvano, a Bradenton Republican, both said Monday that lawmakers must adjust their proposed $92 billion state budget for 2020-21 to account for the revenue drop.

Oliva and Galvano said lawmakers were looking at a spending cut in the range of $200 million, with the idea of moving that money from state programs into a reserve fund.

“What we’re going to see now from here on out and into the summer is probably a difficult economy,” Oliva said. “And we both want to make sure, the Senate president and myself, that we put enough money into reserves.”

Among the spending plans lawmakers may have to reduce is the proposal to increasing starting salaries for public school teachers to $47,500 a year. Lawmakers were negotiating a package in the range of $500 to $600 million.

Republican Gov. Ron DeSantis, who has made the teacher raises one of his top priorities, said he wants lawmakers to preserve the pay proposal despite the impact of the coronavirus.

“We can absolutely walk and chew gum at the same time,” DeSantis said Monday.  “I think we’re on the cusp of really doing a lot for teachers.”

Oliva said he disagrees with the governor’s assessment.

“I think we have to take a look at everything,” Oliva said. “That’s one of the largest recurring expenditures that’s been proposed this year. I think it has to be looked at.”

In addition to teacher pay, Oliva and Galvano also said they may also scale back a $193 million tax-cutting package. Another potential reduction would impact a $100 million funding proposal for Forever Florida, the state’s major environmental land-buying program.

Oliva said lawmakers hope to avoid any cuts in the proposal to fully fund the state’s affordable housing programs at $370 million.

The coronavirus could have a particularly significant impact on Florida’s budget because the state is heavily reliant on the sales tax to fund its programs. And a key component in the sales tax collections come from tourism-related activities in the Sunshine State.

This year, for instance, state analysts projected more than a fifth of the $30.4 billion in general revenue funds collected by the state would come from tourist-related activities. It totals some $6.65 billion.

But the coronavirus outbreak is already impacting economic activity related to tourism, including air travel, conventions, cruise ships and, potentially, theme park visits.

Even before the coronavirus, state economists have consistently warned lawmakers about the volatility of the tourist-related sales tax collections.

“The most recent sales tax forecast relies heavily on strong tourism growth. It assumes no events that have significant repercussions affecting tourism occur during the forecast window,” said a February report from the Legislature’s Office of Economic and Demographic Research.

“Currently, tourism-related revenue losses pose the greatest potential risk to the economic outlook,” the report said. “Previous economic studies of disease outbreaks and natural or manmade disasters have shown that tourism demand is very sensitive to such events.”

The last “black swan” event to impact the state budget was the Sept. 11, 2001, terrorist attacks.