Bad? You Ain't Seen Nothing Yet

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It's kind of hard to be surprised by bad economic and budget news in California these days. After all, there's virtual unanimty that we're in deep you-know-what.

And yet, today's full analysis by the Legislature's nonpartisan budget watchers is still shocking... probably for its opinion that the problems stretch across almost every single aspect of state revenues and expenditures.

The annual fiscal outlook, the first under newly minted Legislative Analyst Mac Taylor, adds some details to the gloomy projections the LAO released just nine days ago. That projection focused on a $28 billion gap by July 2010.

Ready for some more bad news?

The Five Year Flu: The LAO report concludes the current economic storm, which could easily keep blowing into the next fiscal year, will result in a prolonged period of revenue problems. Analysts now predict it will take until the 2013-2014 budget year for state government revenues to surpass those received just last year -- in total, a five year recovery.

And It Could Be Worse: The report, with a nod toward the fact that no one really knows how much worse things will get, includes a scenario where personal income grows only half as much as the LAO now predicts for 2009 and 2010. The result: another $4.5 billion less in state government revenues in the short term.

Capital Gains Collapse: The outlook for capital gains revenues really helps tell the overall story. Profits on stocks and real estate are a major component of personal income tax revenues for the state, and thus a major component of government revenues. The LAO outlook now projects capital gains will decrease from $125 billion in the 2007 tax year to just $65 billion in 2008... almost a 50% drop in one year. In 2009, the LAO believes capital gains will fall to just $41 billion -- that's a 66% evaporation of capital gains revenues in just two years.

Housing, Unemployment: Two more signs of the meltdown... while more than 200,000 new residential building permits were issued in both 2004 and 2005, the annual totals this year and next are expected to only be about 70,000. Meantime, California's unemployment level was about 4.9% in 2006; by next year, the LAO believes it will be 9%... or higher.

Expenses: Lest anyone think the problem is strictly too little cash, the LAO projects an ongoing rise in state government expenses (but to be fair, the projected problems seem to be much more severe on the other side of the ledger). Some biggies -- public schools (K-12) spending to rise by 2.2% a year; Medi-Cal spending to rise by an average of 6.1% a year; in-home supportive services (IHSS) to average 7.9% more a year; and prison spending to increase an average of 2.6% a year.

But the winner... debt service. The LAO predicts payments for all of the state's borrowing through bonds will rise an average of 9.9% a year. That increase includes the bonds approved by voters just two weeks ago.

This kind of sober assessment would presumably shake up the cuts/taxes soap opera that's been playing out in the Legislature these past few years. For now, it hasn't; another leadership meeting today apparently didn't move the ball over the goal line.

Plans for a weekend budget vote in one or both houses have been scrapped... with the best case scenario now being some sort of budget action taken just before that Thanksgiving turkey gets popped into the oven.

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About John Myers

John Myers is Sacramento Bureau Chief for KQED Public Radio and "The California Report," heard daily on 23 public radio stations across the Golden State.

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