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California Revenue May Fall $3.7 Billion Short, Analyst Says

Nov. 16 (Bloomberg) -- California revenue likely will fall $3.7 billion short of what Governor Jerry Brown and Democrats projected for the state budget, with a $13 billion gap looming in the next fiscal year, the Legislature’s fiscal analyst said.

The state’s economy won’t produce the $4 billion in better-than-expected revenue Brown, 73, wrote into the budget in June, the Legislative Analyst’s Office said today in a report. Brown used the projection to help close a $26 billion deficit after Republicans blocked extensions of expiring tax increases.

The new estimate makes it more likely that automatic spending cuts Brown built into the budget will be triggered. The reductions will kick in if revenue misses estimates by $1 billion or more. They could take seven days out of the school year to save $1.54 billion, end $248 million in student busing subsidies, and cut higher-education aid and in-home services for the elderly and disabled.

“Our economy’s sluggish growth means a tax windfall is unlikely, and not a penny of the estimated $4 billion has been collected,” Controller John Chiang said in a statement. Ana Matosantos, Brown’s finance director, acknowledged for the first time that automatic cuts were probable.

The widening gap between actual and estimated revenue means the most-populous state probably will cut deeper into higher education, social services and public safety, Chiang said.

Deeper Cuts

“The governor and lawmakers were smart to backstop their hopeful budget projections with mid-year cuts, but they may not have gone far enough,” he said.

Brown’s finance department is developing its own revenue estimate. The governor, a Democrat, will use whichever forecast is higher to decide as soon as next month on making the cuts.

“Some level of trigger cuts will likely occur, but the exact amount will be known in December,” Matosantos said in a statement. Mac Taylor, the analyst who produced today’s report, told reporters he would be surprised if the governor’s projection differs from his forecast by as much as $2 billion.

By the end of the fiscal year, the state’s deficit will reach $3 billion, even after the automatic cuts, Taylor said in his report. Combined with a projected $10 billion operating deficit in fiscal 2013, he forecast a $13 billion gap that Brown and lawmakers will need to close in the year that begins July 1.

“Eliminating the state’s persistent, annual deficit will require more difficult cuts in expenditures and/or increases in revenues,” Taylor said in the document.

Lawmakers’ Reactions

Lawmakers reacted to the latest projection by suggesting they would try to find ways to avoid the automatic reductions.

“The Legislature and governor should explore all of our available options, and do everything we can, to prevent mid-year cuts,” Senate Majority Leader Ellen Corbett, a San Leandro Democrat, said today in a statement.

“Today’s news is obviously sad but there are other areas of the budget where spending was increased, such as welfare, that we should look at reducing instead of more cuts to schools,” said Sabrina Lockhart, a spokeswoman for Assemblywoman Connie Conway, a Tulare Republican who leads her party in the lower chamber.

Brown didn’t comment on finding alternatives to the automatic cuts, in a statement today on Taylor’s report.

“California’s budget gap is the result of a decade of poor fiscal choices and a global recession,” Gil Duran, a Brown spokesman, said in the statement. “This year, we cut the problem in half. Next year, we’ll continue to make the tough choices necessary until the problem is solved.”

Budget Actions

To balance the $86 billion 2012 budget, lawmakers reduced spending by $12 billion. The Legislature, led by Democrats, also counted on higher revenue, including $4 billion Brown said the rebounding economy would deliver.

At the time, the recovery was showing signs of picking up. However, Europe’s widening debt crisis and the impasse over raising the U.S. debt ceiling shook confidence in its sustainability. California’s jobless rate was 11.9 percent in September, above the 9.1 percent national level and up from 11.7 percent in June. Unemployment in the state hasn’t been less than 11 percent since April 2009.

Cuts affecting home health care and increases in fees for community college students would take effect Jan. 1 if revenue trails the budget’s forecasts by $1 billion. A $2 billion deficit would trigger reductions in school aid Feb. 1, under the formula in the spending plan.

Lauded Mechanism

California Treasurer Bill Lockyer has lauded the trigger mechanism as an important assurance to Wall Street investors who buy the state’s bonds. It helped the state borrow $5.4 billion in September to bolster cash flow, because the debt must be repaid before the end of the fiscal year, he has said.

“We have a mechanism if the revenue projections don’t pan out,” Tom Dresslar, a Lockyer spokesman, said last month. “We are not going to be the old California where we are flailing around in a political maelstrom for months on end. We now have a system in place to deal with revenue shortfalls.”

School districts don’t necessarily have to shorten their school year if they can produce similar savings in other ways, Brown’s Finance Department has said. That may prove difficult under a budget-related law that bars school administrators from dismissing teachers this year even if they get less state aid.

Alternative Options

Alternatives may mean forcing educators and support workers to take unpaid days off. Such steps would require union assent, since the law doesn’t let administrators impose such measures without agreements from workers.

Teachers’ unions and groups advocating against budget cuts are pushing for a ballot measure in November 2012 to raise taxes and boost school aid. Lawmakers also may pass legislation to dilute local education cuts. Brown has vetoed one such bill.

“It’s important to do whatever we can at this point to protect our children and if there is a way to protect them from these terrible cuts, then that’s the right thing to do,” Carol Kocivar, president of the California Parent Teacher Association, said in an interview.

The first round of automatic cuts would slice $200 million from higher education, divided equally between the 23-campus California State University system and the University of California, whose 10 campuses include Berkeley and Los Angeles.

Students in the CalState system face 9 percent tuition increases next year as a result, drawing protests from students. A group of campus leaders from Berkeley and UC Davis went to the Capitol in Sacramento to protest possible cuts to the system.

“Those trigger cuts are going to directly affect” schools and those who attend them, said Joey Freeman, 20, a Berkeley student government spokesman, said in a briefing for Capitol reporters. “This is not a time when we can afford further cuts to higher education and further increases in tuition.”

To contact the reporters on this story: Michael B. Marois in Sacramento at;

To contact the reporter on this story: James Nash in Sacramento at

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