SACRAMENTO – A grim forecast that the state budget shortfall will grow to nearly $10 billion over the next two years produced calls yesterday for prompt and painful action to begin closing the gap now.
A troubled housing market and a soft economy are the big reasons for lower tax-revenue projections, while a $500 million, court-ordered payment to a teacher pension fund on top of last month's devastating wildfires and other problems have driven up costs.
The new outlook from nonpartisan Legislative Analyst Elizabeth Hill is for a $1.9 billion shortfall this fiscal year and an $8 billion gap in the following year.
“The key thing to remember is that all the easy solutions are gone,” Hill said, referring to years of tight budgets. “To get revenue and spending lines into balance will require some really tough choices.”
A beginning step suggested by Hill – cutting $400 million from schools this year because of a lower revenue forecast – drew immediate fire from an education official.
“We would have a serious problem if we tried to take it out of the school district revenue,” said Scott Plotkin, executive director of the California School Boards Association.
He said school districts have hired staffers and launched spending plans for the current year based on receiving all of the revenue promised in the state budget.
Lawmakers rarely close projected budget gaps in the middle of a fiscal year, the most recent of which began July 1. Hill said action is urgent because as the economy weakens, the state is projected to continue to spend more than it takes in.
Her forecast is that tax revenue will increase 4.6 percent next year, despite the troubled housing market, while spending will increase 7 percent if no changes are made.
The forecast of a $10 billion shortfall in a general fund expected to be $104 billion next year is a gap of nearly 10 percent – big, but far from a record.
Former Govs. Pete Wilson and Gray Davis faced budget gaps that were about one-third of the general fund. Wilson raised taxes, and Davis, who faced a revenue collapse with the burst of the dot-com bubble, used an unprecedented deficit bond.
But Gov. Arnold Schwarzenegger, who replaced Davis in a historic recall in 2003 in part because of the budget problem, has been unable to bring spending in line with revenue.
In fact, general-fund spending in the four budgets signed by Schwarzenegger increased by about one-third – much faster than the increase of less than 20 percent in the five budgets signed by Davis.
Schwarzenegger's earlier budgets narrowed the chronic deficit. But trouble was already expected when he signed a budget in August after a two-month deadlock driven by Senate Republicans who wanted spending cuts.
“Since the day that this year's budget was signed, we have made it abundantly clear that next year's budget will be a difficult one,” Schwarzenegger said in a statement issued yesterday.
“Today's developments underscore that fact, and they also underscore the need to begin serious discussions on budget reform,” the governor said. “I hope that the Legislature will join with me to make this a priority.”
The slumping real estate market and the rise in unemployed construction workers and mortgage lenders have resulted in a decrease in property tax, sales tax and state income tax. More than half of the state's revenue comes from income tax.
Schwarzenegger signaled the severity of the situation last week when he asked state agencies to submit plans for a 10 percent budget cut.
The new forecast prompted Senate President Pro Tempore Don Perata, D-Oakland, to repeat his call for leadership discussions to end the chronic deficit and create a more predictable revenue stream.
“There is an ongoing gap between state expenditures and revenues that this governor helped create by slashing vehicle fees and refusing to balance that loss with revenue from another source,” Perata said in a statement. “That alone accounts for $6 billion of this problem.”
In his first move after taking office, Schwarzenegger fulfilled a campaign promise and repealed a vehicle license fee or “car tax” increase enacted under Davis.
Senate Minority Leader Dick Ackerman, R-Tustin, who led a budget deadlock that resulted in a $750 million cut, said yesterday that lawmakers can't wait until next spring and summer to deliberate.
“We must tackle this problem head-on, and now,” Ackerman said in a statement.
Sen. Bob Dutton, R-Rancho Cucamonga, has urged Schwarzenegger to declare a fiscal emergency under Proposition 58, a balanced-budget measure, forcing the Democratic-controlled Legislature to deal with the budget problem before acting on other issues.
In recent years, tax revenue from a strong economy has helped lawmakers paper over a chronic budget deficit. Democrats oppose deep spending cuts, and Republicans oppose tax increases.
Among the alternatives to spending cuts and tax increases available to lawmakers is the $3.7 billion remaining from a $15 billion deficit bond approved by voters in 2004. Some lawmakers also are likely to recommend delays in increases for programs for the poor, the disabled and others, along with raising taxes.
Schwarzenegger has talked about leasing the state lottery to a private operator, which Wall Street firms have told him could yield a one-time payment to the state of $14 billion to $37 billion.
Democrats oppose the governor's proposal to use a lottery lease to help finance a sweeping health care plan. He also has argued that fixing the health care system would aid the budget by keeping the economy strong.
But critics say the governor's plan to provide universal health care is flawed and could worsen the shortfall.
Schwarzenegger is still struggling to get action on his health care and water proposals in special legislative sessions he called after the regular session ended in September.
The chairwoman of the Senate budget committee, Denise Ducheny, D-San Diego, said the Senate will hold a hearing on Hill's report Nov. 27. She said midyear action on the budget hasn't been ruled out.
“It's clearly something we are going to have to consider,” Ducheny said. “But we probably won't jump until we see the governor's January proposal.”
