California Nears Automatic Spending Cuts With Revenue $705 Million Short
California’s revenue for the fiscal year that began three months ago has fallen $705 million below what Governor Jerry Brown and Democrats projected, approaching a level that may trigger automatic university spending cuts and higher community college fees.
September revenue came in $301.6 million below estimates, Controller John Chiang, a Democrat, said in a report today. July was $538.8 million less than forecast, Chiang said Aug. 9. Revenue in August was $135 million more than expected.
The $86 billion general-fund spending plan Brown signed in June included a series of cuts activated if higher revenue doesn’t materialize. The first, if the shortfall is $1 billion, would trim University of California and California State University budgets each by $100 million and increase community- college fees by $10 million.
With a $2 billion gap, the contraction would mean a seven- day reduction in the public-school year to save $1.54 billion and an end to $248 million in home-to-school busing subsidies. Brown’s finance department will determine in December if the cuts are needed based on revenue projections for the remainder of the fiscal year.
“The potential for revenue shortfalls is precisely why the Governor and Legislature included trigger cuts in this year’s state spending plan,” Chiang said in a statement. “September’s revenues alone do not guarantee that triggers will be pulled. But as the largest revenue month before December, these numbers do not paint a hopeful picture.”
Washington Supercommittee
California’s situation has parallels in Washington, where a congressional supercommittee must agree on at least $1.2 trillion in savings or the U.S. will face automatic cuts of that amount.
Brown and Democrats conceived the triggers after failing to get Republican support for a referendum that would have extended expiring taxes and fees to help erase what was a combined $26 billion shortfall. To balance the budget, lawmakers cut spending by $12 billion. They also counted on an equal amount of higher revenue, including $4 billion Brown and fellow Democrats said the recovering economy would deliver.
At the time, it appeared the U.S. economic recovery was picking up pace. But California’s unemployment rate was back up to 12.1 percent in August after falling to 11.7 percent in May. In the first three months of the fiscal year, the only revenue to exceed projections is personal income taxes, at $502 million more than estimated.
Bond Sales
California Treasurer Bill Lockyer is scheduled to sell $483.5 million of tax-exempt public-works bonds beginning Oct. 13. California debt yields about 1.14 percentage points more than top-rated municipal debt, compared with a peak yield spread this year of 1.47 percentage points in June, according to data compiled by Bloomberg.
When California sold $2.4 billion of general-obligation bonds last month, the debt was priced to yield 3.17 percent on 10-year maturities, as much as 109 basis points above top-rated tax-exempt debt. That compares with a 160 basis-point premium on similar bonds sold in March 2009. A basis point is 0.01 percentage point.
To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
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