ShareThisBy CLEA BENSON
Monday, November 20, 2006
`With a decline in home sales driving a slowdown in California's recent economic boom, lawmakers will find it "much tougher" to balance the state budget next year than they did this year, the Legislature's nonpartisan budget adviser said in a report Wednesday.
The economy is still doing slightly better than lawmakers expected when they approved the current $131 billion state spending plan in June, partly because oil prices have dropped since the summer, the report said.
But if trends continue, the state will still take in about $5 billion less than it spends for the fiscal year beginning July 1, 2007, Legislative Analyst Elizabeth Hill said.
"Basically, we're living on borrowed time," Hill said at a news conference Wednesday where she urged lawmakers to end the operating deficits.
To cover costs, lawmakers will have to find a way to cut about $2 billion out of the budget for the 2007-2008 fiscal year even without increasing spending on current programs or creating new ones, the report from Hill's office said. An expected $3 billion reserve at the end of the current fiscal year would bridge the rest of the gap.
The report reflected a marked difference in the economic climate from this time last year, when an unanticipated surge in personal incomes was pouring a windfall of billions of dollars into state coffers.
By the end of the last fiscal year on June 30, the state had an unexpected cushion of about $7.5 billion that the Legislature and the governor used to expand funding for schools, restore cuts to social programs, and pay off debt.
Legislative leaders from both parties and administration officials said it came as no surprise that the next fiscal year would be tighter.
Still, Gov. Arnold Schwarzenegger, heading into his second term, has hinted that he has ambitious plans and has vowed to not raise taxes. He has said he is eager to get started on massive public works projects using some of the billions of dollars in infrastructure bonds voters approved in November. He also is expected to lay out a comprehensive plan for reforming health care when he delivers his State of the State speech in January, a plan that could incur at least some new government costs.
Schwarzenegger's staff said he would wait until more economic data comes in near the end of the year before deciding what will go in the budget he proposes in January.
"Our economic fundamentals are sound," said H.D. Palmer, spokesman for the governor's Department of Finance. "California alone was responsible for 30 percent of the nation's total job growth in September....That certainly doesn't give us a license to spend with abandon."
Palmer said the Department of Finance already had begun turning down requests from state agencies to boost their budgets next year.
Though the infrastructure bonds would only add about $43 billion over ten years to the state's $70-billion annual construction industry, both the governor and legislative Democrats said spending the money would help the real estate sector rebound.
"The Legislature must finish the job we started - and voters approved - this year and push the projects out the door to offset the downturn in the housing industry," Senate President Pro Tem Don Perata, D-Oakland, said in a statement Wednesday. "Workers can move from building houses to constructing roads, levees and schools."
Meanwhile, legislative Republicans urged spending restraint.
"Now more than ever, lawmakers and the governor must resist the temptation to create costly new government programs that California simply cannot afford," Assembly Republican Leader Mike Villines, of Clovis, said in a statement.
Though the Legislative Analyst urged caution in budgeting, the report was guardedly optimistic about the state's economy. It predicted that the state's finances would rebound slightly next year and experience "moderate growth" in 2008.
In the past year, the report said, the state has seen a slowdown in wage and salary employment, taxable sales, and income tax withholding payments this year, caused mainly by a sharp decline in residential real estate.
But the report also noted that most of the state's economy is doing well. International trade, information-related industries, and high-tech firms are posting growth. And oil prices, at about $78 a barrel in the summer, have dropped to about $58 a barrel.Education advocates, who have been engaged in bitter struggles to maintain school funding in recent years, got some good news. Hill predicted that there would be more than enough resources to cover basic cost increases, leaving about $300 million next year for discretionary education spending. That amount could increase to about $2 billion annually in a few years, the report said.
"I think the outlook is certainly better than we anticipated," said education consultant Kevin Gordon. "Not by a huge amount, but the outlook over the next few years is very positive."
At the same time, Hill cautioned that the state is facing some risks that could cause the economy to do worse than projected.
Real estate sales could continue to fall sharply, and the cost of complying with court orders to improve the prisons could rise, she said.
In addition, the report's forecast did not include the potential liability of adding billions of dollars to the budget to reflect the true cost of state retiree pensions and health benefits, an amount approaching $100 billion.
