California facing more huge deficits

This does not bode well for either California or the administration of Arnold Schwarzenegger. Whenever an executive- in the government or private sector, makes “across the board cuts” it is a pretty good indication that they don’t have a handle on the situation. It is also likely that this will table efforts to provide health care for the uninsured, and will probably delay much needed water projects. As the San Francisco Chronicle reported:

The meltdown in the housing market and slowing California economy are likely to create a shortfall in the state budget next year of as much as $11 billion, according to estimates made Tuesday. In response, Gov. Arnold Schwarzenegger has asked department heads to stop spending what they can today and prepare for bigger cuts next year, according to legislative sources. Schwarzenegger won re-election in 2006 in part because of the perception that he had restored order to the state’s chronic spending problems. But the deepening slump in the real estate market, combined with risky assumptions from this year’s $145 billion spending plan, have resulted in a return of the big imbalance between what the state takes in and what it spends. The governor and Legislature will face yet another difficult budget in 2008 that will require either deep spending cuts across the board or perhaps consideration of new taxes – something the Republican governor has resisted in the past…

The current budget, adopted in August after a two-month impasse, was considered by many a victory for conservatives because of its austerity. The plan provided a record reserve of $4 billion and paid off $2.5 billion in bond debt early, while providing for all major services. But some of the plan’s assumptions have not been realized – such as $300 million in income from the expansion of Indian casinos and the $1 billion sale of the state’s EdFund, an agency that services student loans. There have also been unanticipated costs, such as health care and other expenses at state prisons ordered by the federal court. Meanwhile, collection of taxes from the state’s three major sources of income – personal income tax, sales taxes and corporate taxes – have been sliding downward since spring.

The state ended the 2006-2007 fiscal year more than $800 million below forecasts and started the first quarter of the 2007-2008 fiscal year another $770 million short. Administration officials said they are not ready to comment on how big the deficit will be next year except that it will be far higher than the $6.1 billion estimated in August. The meltdown in the housing market and slowing California economy are likely to create a shortfall in the state budget next year of as much as $11 billion, according to estimates made Tuesday. Administration officials said they are not ready to comment on how big the deficit will be next year except that it will be far higher than the $6.1 billion estimated in August.

Some experts, like Stephen Levy, senior economist for the Center for Continuing Study of the California Economy, a nonpartisan research group based in Palo Alto, said it could be as much as $11 billion. “The order that was restored was temporary,” said Levy, noting that the state was saved from similar troubles two years ago when billions of unanticipated tax revenue arrived as a result of capital gains taxes imposed on big tech stock holders who sold out. Insiders at Google Inc., for instance, sold a total of $3.7 billion worth of Google stock in 2006 and $4.3 billion worth in 2005. “We went through the reserves that were built up in the Google years,” Levy said. “And now with the housing market, we have all major tax forecasts going lower.”