`We Haven't Hit The Bottom And Won't Until 1993'

After 64 days, a key veto, and endless wrangling, the worst fiscal crisis in California's history ended on Sept. 2, with the legislative equivalent of a whimper. Tired lawmakers, anxious to launch their campaigns for the November elections, sent Governor Pete Wilson what he had wanted all along--a $57.4 billion budget that was heavy on cuts in social spending. As he signed the measure in Sacramento at 1:45 a.m., the embattled Republican governor no doubt sensed victory. Wrong.

While the state finally can start cutting checks to cover the $3 billion in IOUs it has handed out, the new budget is only going to make the lackluster California economy worse. Even before the crisis, the state was limping along with an 8.9% unemployment rate. The onetime economic dynamo had lost 700,000 jobs--60% of them in Los Angeles County alone--through defense layoffs, a downturn in homebuilding, and painful restructuring in the retailing and high-tech sectors.

FUTURE CRUNCH. The austere measures will take more than $6 billion away from education, health and welfare services, and strapped local governments. "That will ripple back through the state's economy and slow any chance of recovery," frets Jack A. Kyser, chief economist for the Economic Development Corp. of Los Angeles. "We haven't hit the bottom--and won't until 1993."

While Wilson got his budget, it's one that presumes that the California economy will rebound this year, bringing job growth and additional tax revenues. That's unlikely to happen. Instead, state and local governments will lose 50,000 jobs or more by the end of next year, and the defense industry will lay off perhaps an additional 25,000, predicts David Hensley, an economist at the University of California at Los Angeles.

That could very well bring a future fiscal catastrophe--a revenue shortfall as high as $5 billion, Hensley forecasts. "So a year from now, there will be another budget deficit problem of significant dimensions," he says.

Revisiting the same problems after this year's sharp cuts could make the current drawn-out affair look like a frolic on a California beach. For one thing, with elections approaching, both sides carefully avoided a tax hike. Next time around, taxes will be on the table. That will fracture an already shaky coalition of Republican Wilson and the Democrat-controlled assembly.

And it will further erode the state's fast-fleeing economic base by zapping employers. Business, which got slammed with big taxes to balance last year's budget, figures it got lucky this year. "The politicians recognized that it's politically unacceptable in an election year to tax business," says Allan S. Zaremberg, senior vice-president of the California Chamber of Commerce.

EXODUS. Tax hikes next year can only worsen the situation. In preliminary findings of a study by five California utilities, the business climate was the overwhelming reason companies left the state. The report says that California lost 668 manufacturing plants or planned expansions between 1987 and 1992. Nearly 80% cited high costs--taxes, wages, and workers' compensation premiums--as the motivation.

More than 20% of those operations moved to Mexico, a trend that labor leaders fear will be amplified by the North American Free Trade Agreement, which topples trade barriers between the U.S. and its poorer neighbor to the south. Texas and Nevada are the big domestic gainers from Golden State defectors. "California leads the country in manufacturers that are moving to Mexico and will lead the country in military-contractor and base shutdowns," says Jim Benn, executive director of the Federation for Industrial Retention & Renewal in Chicago, who sees eerie parallels between California's plight and the Rust Belt of the 1970s. "That is going to make Los Angeles the Pittsburgh of the '90s."

In his eagerness to abridge spending, Wilson's cuts may have a real, long-lasting negative impact. The bill that broke the budget stalemate lowers the floor for spending on education and also contains sanctions discouraging school districts from suing the state for more money. If California's brightest hope lies in the quality of its work force, as many businesses insist, then the outlook is mighty gray for the country's sunniest state.

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