State's revenues fall $1 billion behind

Published online on Tuesday, Oct. 13, 2009

Three months ago, as Gov. Arnold Schwarzenegger and the Legislature enacted a much-revised state budget, this column pointed out that the state was seemingly operating on a five-month budget cycle.

With recession rampant, it would take about three months for new holes to appear in a revised budget and two more months for the politicians to make still another adjustment.

As if on cue, state Controller John Chiang is providing new evidence that the 2009-10 budget is leaking red ink. During the first quarter of the fiscal year, state revenues came in more than a billion dollars under the budget's forecast.

Other key assumptions in the budget, such as a $1 billion sale of the State Compensation Insurance Fund or another billion in federal funds, also are not happening, a series of wildfires scorched a tiny emergency reserve, and so far the state is losing budget-related lawsuits.

"Revenues more than $1 billion under estimates and recent adverse court rulings are dealing a major blow to a budget that is barely 10-weeks old," Chiang said. "While there are encouraging signs that California's economy is preparing for a comeback, the recession continues to drag state revenues down. I urge lawmakers and the governor to prepare for more difficult decisions ahead."

The $1-plus billion shortfall, it should be noted, includes an adjustment for the $3 billion revenue fudge factor that was attached to the latest version of the budget, which makes it a very bright red flag. Were it to continue to grow for the remainder of the year, it would amount to a $4 billion gap, and it could be twice as large if other assumptions continue to fall short.

Schwarzenegger and legislators could easily find themselves facing a multibillion problem in a couple of months. And since they seem to be scraping the bottom of the budget gimmick barrel, it may mean big spending cuts, given the political impossibility of raising taxes again.

The administration already has forecast a $7.4 billion deficit for 2010-11 but that assumes that the current year winds up as planned, not billions of dollars out of whack. With a continuing spate of negative economic forecasts for California, the more realistic assumption might be a $10-plus billion deficit for 2010-11. Then it will get worse.

The administration says the state can look forward to annual deficits in the $15 billion range for the 2011-12 and 2012-13 fiscal years, largely because the temporary taxes enacted in February will expire and some of the spending deferrals and loans must be repaid.

Other budget-watchers think $20 billion a year would be more accurate.

These fiscal chickens will come home to roost just as a new governor takes office in 2010.

Schwarzenegger was elected in 2003 on his promise to close the state's chronic deficits, but he has failed, and he will dump the mess on the desk of the man or woman unfortunate enough to succeed him.