Page 12 - FY 2021--22 Revenue Outlook

The Economy and Revenue Assumptions
Fiscal Year 2021-22

One year ago, the onset of the COVID-19 pandemic and the introduction of
public health measures meant to control its spread brought on massive disruption
to businesses, the economy, and society at large. At that time, while economists
largely agreed that the pandemic and closures would trigger a recession, there
was no consensus on its severity or length. Citing the relative health of the pre-
pandemic economy, higher state and local government reserves and current
stimulus efforts, less conservative forecasts predicted a U-shape recession and
recovery in 2021. At the same time, others offered bleak predictions for a sharp
and extended economic downturn, possibly equaling the impact of the Great
Depression.

Unable to predict the severity or length of the pandemic and public health
restrictions, revenue estimates for 2020-21 were based on the information
available at the time. With the initial closure order scheduled to end in May of
2020, a full reopening was expected by the start of the new fiscal year, and most
revenue estimates reflected the expected recovery in monthly receipts by the end
of the 2020 calendar year. The initial impact that the initial Safer-at-Home order
had on City operations, from closed offices and reduced demand for services,
were used to estimate decreased departmental receipts. Historical data from
prior recessions for the economically sensitive revenues were used to estimate
the impact of a shock-induced recession and swift recovery. In light of the
challenges in forecasting revenue with so many unknowns, the estimated
revenues for 2020-21 are falling significantly below plan.

For the first half of 2020-21, the length and severity of the pandemic presented a
moving target in predicting when public health restrictions would end and the
economy (and revenues) would begin recovery. The shortfall between budget
assumptions and realized receipts grew monthly, resulting in an estimated year-
end revenue deficit nearing $600 million for 2020-21. The extended social-
distancing measures, limited business reopenings followed by renewed closures,
and tighter travel restrictions, has placed an increasing strain on the economy.

The pandemic’s economic impact to business and employment sectors has
varied with travel, entertainment, and the leisure and hospitality sectors taking
the greatest hit. Manufacturing, retail and personal service activities that depend
on close contact have also sustained deep impacts. Unemployment within the
City shot up from 4.7 percent (February 2020) to 19.1 percent during the height
of the public health restrictions and is currently at 10.2 percent. Of the
businesses that closed during the pandemic, many will never reopen. Tourism in
the County of Los Angeles (County) dropped 48.5 percent from 2018-19, due to
the travel restrictions and economic downturn that began in 2019-20, and
recovery will need to overcome tourist hesitancy and reduced demand for

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