California’s Next Governor Faces Four Years of Fiscal Hell

The first term of California’s next governor will be a fiscal nightmare with a cumulative budget shortfall over four years of nearly $83 billion, according to the fiscal forecast released November 18 by the Legislative Analyst

During his last year in office, Gov. Arnold Schwarzenegger and the Democratic majority Legislature face a $21 billion gap between revenues and spending commitments, a problem whose solution is made more difficult by the political timidness that usually marks election years.

The GOP governor said on November 9 he expected a budget hole of some $14 billion between now and July 1, 2011, absent any action by himself and lawmakers. 

A spokesman for Schwarzenegger’s Department of Finance said “there isn’t a great deal of difference” between the administration and the analyst’s revenue estimates but added some the unrealized budget savings cited in the report as causes for the increased shortfall will materialize. 

The grim report, which assumes no pay raises for state employees or cost-of-living increase for state programs, shows revenue shortfalls, beginning in the fiscal year that starts July 1, 2011, of $21.3 billion, $23 billion the following year, then $20 billion and $18.4 billion for the fiscal year starting July 1, 2014, the final year covered by the forecast. 

And that projection assumes tax revenue will climb by 6.6 percent each year starting in 2013.

“The scale of the deficits is so vast that we know of no way that the Legislature, the governor and voters can avoid making additional, very difficult choices about state priorities,” the report says. “In the coming years, major state spending programs will have to be significantly reduced. Policymakers will also need to add revenues to the mix.”

Beginning in the fiscal year starting July 1, 2010 – Schwarzenegger’s last budget which he will propose in January – billions in federal economic stimulus dollars will start to disappear. The GOP governor and lawmakers used those funds to temper state cuts to public schools, higher education, social services and health care programs.

For example, public schools were dunned $14.5 billion over the last two fiscal years – slightly less than half of the total cuts made in state spending — but received $6 billion in federal stimulus money as an offset.

“If the state funds schools at the levels reflected in our forecast, school districts could face significant difficulties due to the simultaneous decreases in federal and state and local funding.”

The forecast does show state revenues increasing in the final three fiscal years covered which will increase the minimum amount the state owes schools by more than $3 billion in each of those years.

In addition, while the forecast assumes the state will win various lawsuits challenging previous budget actions it also notes that if the state loses, its budget situation worsens significantly.

There are 20 lawsuits challenging Schwarzenegger’s policy of furloughing state workers three Fridays each month. The furlough policy is expected to save $1 billion during the current fiscal year, which ends June 30, 2010.

Another lawsuit challenges a two-year $2 billion shift of local redevelopment agency funds to the state.

Echoing an October warning by State Treasurer Bill Lockyer that debt payments on state bonds are rising to unprecedented levels, the Legislative Analyst notes that in the fifth and final year covered by the forecast debt service will consume 9 percent of the general fund. 

Over the life of the forecast, the state’s retirement and debt payments combined rise from 12 percent of the state’s cash-starved general fund to 15 percent, reducing the revenue available for other state programs.

State costs for Medi-Cal, California’s health care program for the poor, are expected to climb from $12 billion this year to $19 billion in the fiscal year beginning July 1, 2014.

In the 2010-2011 fiscal year, temporary tax increases enacted in the budget signed in February trigger off, reducing state revenues by $4.6 billion.

Among those taxes disappearing are a .25 percentage point increase added to each personal income tax rate and a reduction in the state dependant care credit. The temporary 1-cent increase in the sales tax ends June 30, 2011. 

Nor is the pace of the state’s economic recovery clear, the report says.

While a “sluggish” recovery is predicted for 2010 and 2011, California’s unemployment will still remain in double digits – 12.1 percent and 11.3 percent, respectively — during those two years.

And while budget balancing requires reductions in services, the state’s population will increase by more than 400,000 persons annually over the next five years boosting the state’s population to over 40 million in 2013 and more than 41 million in 2015.


Filed under: Budget and Economy

1 Comment »

  1. This is a sobering forecast, but not at all unexpected. There were no real cuts in any of the attempts to produce budgets in 2007-09, only deferrals, tricks and gimmicks intended to “kick the can down the road”.

    There’s one big caveat: the Legislative Analyst assumes interest rates will remain low. What if they don’t? The impact of higher rates on debt service will easily cost CA billions more and make the projected deficits looks tame by comparison to what could easily happen.

    The next governor and Legislature need to cut aggressively in all areas, starting with schools, prisons and MediCal. Politicians need to realize that their revenue stream isn’t running at the bubble-induced levels of 2006, and need to adjust to the realities of 2009.

    It would also be prudent for Sacramento to seek out any and all opportunities to cutoff aid to illegal aliens, which has been estimated by Arnold and George Skelton (L.A. Times) to cost at least $5 billion/year. Let’s see, that’s about 25% of the projected deficits, if one assumes ~ $20 billion/year.

    Other opportunities exist in combining state agencies (why can’t the Franchise Tax Board, Board of Equalization and Department of Finance be combined into one agency?) and eliminating redundant boards and commissions. I don’t care if the cuts are done with a scalpel or a chainsaw, let’s get moving!

    Comment by HBGuy — 11.19.2009 @ 10:34 am

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