Legislative Analyst Mac Taylor calls Governor Brown's assumptions about tax revenues "a little bit optimistic." But how much is too much? (Photo: KQED/John Myers)

That scenario is one that lawmakers at state Capitol should consider carefully, urges the Legislature's independent budget analyst.

"The Legislature faces a very difficult situation" in how to budget given the political uncertainty over taxes, Legislative Analyst Mac Taylor said in a midday news conference to discuss his office's new report.

So, too, do the biggest benefactors of state revenues: schools. The LAO report reaffirms what our education reporter Ana Tintocalis found for her Monday radio story: school districts are already assuming the worst.

That reaction is no doubt in large part due to their 2011 experience with the budget's 'trigger cut' mechanism and the inclusion of yet another one of these automatic cuts -- a bigger one -- in 2012 should the November 6 ballot measure to raise taxes fail.

And on the tax measure is also a source of disagreement. On Monday, the LAO analysis of Brown's income and sales tax initiative came in at $2 billion less than what the governor's number crunchers have estimated.

The new report only adds to the dispute, with the LAO believing Brown's overall revenues are too optimistic in the current 2011-12 fiscal year, the budget year beginning July 1, and even in future years.

Legislative Analyst Taylor said all of that big picture disagreement hinges on a very small part of California's population: high income earners. The LAO revenue models project, in their words, "significantly less" personal income taxes from the wealthy -- most notably in the 2012 tax year.

"We're just not sure how they (the Brown administration) get to their numbers," Taylor told reporters.

The analyst pointed out that the state budget's growing reliance on personal income taxes, which now account for more than 60% of budget dollars. So, too, is the much discussed reliance on the fortunes of the state's most wealthy -- literally, the top 1% of taxpayers.

The LAO report points out that Governor Brown's new budget projects 2012 capital gains by California taxpayers to be a whopping $34 billion higher than the LAO's own analysis from November. That translates into a $3 billion disagreement in personal income tax revenues.

"In order to get the kinds of [revenue] gains the administration is forecasting," said Taylor, "it kind of looks like you need pretty good improvement in capital markets and housing markets." And he said neither seems to be in the tea leaves.

Which gets us back to the budgeting choices that legislators need to make in the coming weeks and months, and the political context in which those choices will be made.

As we learned last week, legislative Democrats are either skeptical or outright opposed to enacting spending cuts by early March, preferring instead to wait for April tax receipts to give a more accurate look at the cash available. On the one hand, the LAO report seems to affirm the 'wait and see' strategy, in that it casts doubt on the governor's estimates.

But on the other hand, it also may fuel Republican legislators' calls for an even more prudent budget, one that doesn't hinge on a major tax increase being ratified by voters this fall.

"It will simply result in yet another boom and bust cycle, which caused our current budget crisis," said newly elected Senate GOP leader Bob Huff in a statement on the governor's tax initiative and the concerns raised in the LAO report.

Meantime, a different political question comes to mind. Suppose that the governor's campaign to raise taxes extols the virtue of those taxes as protecting schools (as it no doubt must)... but at the same time schools begin cutting their budgets for a worst-case scenario of the taxes being defeated. How does that dissonance play out in the minds of the public?

That forecast, released this morning, projects the state will take in $3.7 billion less revenue than the budget signed by Governor Jerry Brown, thus paving the way for potential automatic cuts of almost $2 billion to K-12 schools, higher education, and social services.

"The remaining work of eliminating the state's persistent, annual deficit will require more difficult cuts in expenditures and/or increases in revenues," says the report prepared by Legislative Analyst Mac Taylor and his staff.

Unlike most years, the LAO finding of an overly optimistic state budget doesn't just put pressure on legislators to search for more solutions in the new year. This time, under a provision largely demanded by Brown, that missing of the mark may lead to automatic cuts of about $2 billion.

The list includes $100 million each from the UC and CSU systems; $100 million each from the Department of Developmental Services and the In-Home Supportive Services (IHSS) programs; a cut to K-12 schools and community colleges; and more.

Of course, the key phrase is "may lead to automatic cuts." The budget bill that lays out this scenario makes it clear that the so-called 'trigger cuts' are based on the higher of the two annual revenue forecasts: one conducted by the LAO, and next month's forecast from Brown's Department of Finance.

Might the governor's budget team have a more rosy assessment of the state's economy and revenue stream? Sure. The question, though, is how much more rosy; after all, $3.7 billion is a big gap and the automatic cuts begin to kick in even after just $1 billion in missed projections.

Governor Brown and others, most notably Treasurer Bill Lockyer, lauded the 'trigger cuts' provision as a way to help convince investors in California debt offerings that the budget was credible. In a June letter to Brown and legislative leaders (PDF) Lockyer called the trigger mechanism "a strong contingency plan in the event of revenue shortfalls."

Few who have followed the monthly revenue reports of the state are surprised that the budget's plan is coming up short. Today's sober assessment from the LAO will also reignite debate over how the budget deal finally came together in those last few days of June. After all, it was the quick -- and relatively unexplained -- pronouncement of additional $4 billion in revenue that brought Brown and Democratic leaders in the Legislature to shake hands on a deal, just days after the governor vetoed the first budget sent to his desk.

That $4 billion was never fully placed into context; in other words, it wasn't allocated using the traditional process of revenue estimates and predictions. As such, it's remained a lingering sore point with some budget watchers -- a hard-to-justify bump in revenues that ended a tense standoff between the Democratic governor and Democratic legislators.

And things aren't likely to get better soon. "The latest evidence," writes the LAO, "suggests that the state and national economies continue a slow, arduous recovery from this staggering economic drop-off."

Update 12:03 p.m. Reaction is already coming in from those who would be impacted by the trigger cuts. From Karen Keeslar, executive director of the California Association of Public Authorities, which helps those on IHSS: "Approximately 250,000 seniors and people with disabilities are expected to be hit with the full 20% cut to service hours." Keeslar's email says that the average IHSS consumer now receives approximately 86 hours of care a month and those impacted by the budget trigger would lose approximately 23 hours of monthly care.

Update 1:04 p.m. Assembly Speaker John Perez takes cautious approach to LAO forecast, issuing a statement calling it "indicative, but not determinative" of trigger cuts... Assembly Budget Chairman Bob Blumenfield (D-San Fernando Valley) says the LAO revenue projection "validates the need to raise revenues to finish what we started"... Assemblymember Jim Nielsen (R-Gerber) says it's proof more cuts are needed; "Government has changed very little in how it conducts its business in the last three years," says his statement... Senator Ellen Corbett (D-San Leandro) says the trigger cuts need to be rethought. "The Legislature and governor should explore all of our available options," she said in a written statement.

Update 3:07 p.m. In his press conference with reporters, Legislative Analyst Mac Taylor said the projection of a pulled budget trigger reflects a June budget revenue forecast that lawmakers "knew was risky." He also pointed out that the only sure bet now is that the full $2.5 billion trigger won't be pulled; that's because the only forecast that counts between his LAO projection and one soon to come from the Department of Finance is the one that's higher -- thus, even if the DOF data is worse, the trigger would be limited to about $2 billion in cuts.

Meantime, more reaction... Senate GOP leader Bob Dutton: "the Democrats' 'Hope without Change' budget was built on false assumptions and gimmicks. It's unfortunate that our prediction in July that there would be a $13 billion shortfall was right on target"... Dean Vogel, president of the California Teachers Association: "It's time to put a fair and equitable tax system in place so that our students and the most vulnerable Californians don’t have to continue to do without."

But the most important reaction, at least in terms of what happens next, comes from Governor Brown's budget director, Ana Matasantos. She's the one who releases the administration's economic forecast on December 15 and would then pull the budget cut trigger. "The budget the governor signed recognized that economic uncertainty could force the trigger cuts to take effect," said Matasantos in a written statement. "Some level of trigger cuts will likely occur, but the exact amount will be known in December."

"The chance that anywhere near all of the federal funds and flexibility sought by the Governor in his budget package is almost nonexistent," concludes the new report from Legislative Analyst Mac Taylor.

Taylor and his team say they believe there's a good chance that California will get some extra help from the feds to help balance the 2010-11 budget, but not as much as Schwarzenegger has written in to his projection of state revenues.

On the whole, the LAO report agrees with the governor on the size of the state's fiscal mess (though they pegged it at $21 billion in their November assessment). Still, there are some notable red flags that Analyst Taylor and his team are raising about the proposal.

First up: the administration's plan to reduce projected K-14 education funding by $2.2 billion. Taylor notes that there could be other interpretations of the constitutional school funding language -- yes, again, it's a Proposition 98 thing -- that would dispute whether the Schwarzenegger plan is following the law.

Another legal question raised by the new report is the governor's call for government workers to contribute an extra 5% to their pension funds, thus reducing a like amount now paid by the state. "It is quite unclear," says the report, "if the state can unilaterally— without agreements with its employee unions— increase required employee contributions for CalPERS pensions." Answering a reporter's question last week, Schwarzenegger seemed to say he would negotiate with legislators, and not public employee labor unions, on the package of worker savings (total: $1.636 billion).

But the state budget's interaction with federal funding is probably the big headline out of this LAO first glance at the Schwarzenegger spending plan. "The Legislature needs to operate on the assumption that federal government relief will total billions of dollars less than the Governor wants," says the LAO report. In an unrelated event this morning, Schwarzenegger said he will travel to Washington next week.

In fact, the gubernatorial plan includes other federal aid -- money outside the big $7 billion request -- that could prove problematic. For example, the Leg Analyst says, the governor is expecting a reinstatement of estate tax revenues for the state, revenues that have been scooped up by the feds in recent years. But as the LAO points out, Congress appears poised to reclaim those dollars... which would mean $892 million in state revenues counted on by Schwarzenegger would disappear. And, in a nod to last year's protracted saga of a different federal "trigger" of money vs. cuts, the Leg Analyst recommends any plan that enacts cuts in the absence of DC dollars should have very precise legislative intent, making the pulling of said trigger to be as clear, and "ministerial" as possible.

The report also slams Schwarzenegger's proposed constitutional amendment to ensure UC and CSU funding always be larger than that of the prison system. The LAO assessment? "It is a 'feel good,' but ultimately ill–conceived, autopilot budgeting measure that would unwisely tie the budgetary fates of two very different state programs."

But back to the budget... Legislative Analyst Taylor says that legislators must act quickly and enact many of the needed fixes by the end of March. That's because many of the policy changes, especially if the various social services cuts pitched by the Guv are accepted, will take several months to actually implement.

Two and a half months to sort all of this out? Perhaps. But that means an awful lot of concessions from all sides in the budget debate that, for now, aren't being talked about.

Update: Taylor just finished briefing reporters on his assessment of the budget. He said that lawmakers shouldn't assume more than about $3 billion from the feds, and not the governor's $7 billion estimate (actually $8 billion once all proposals are included). And Taylor didn't mince words about Schwarzenegger's higher ed-before-prisons proposed amendment to the state Constitution:

"There's something, also, I particularly don't like about pitting programs areas against each other. I mean, what's next? IHSS versus debt service? Or mental health versus the courts? I mean, that's not what budgets are about. Budgeting is about, every year, looking at your priorities and figuring out what you can spend on each of those."

But deeper inside the new in-depth analysis of the Legislative Analyst's Office are examples of a government budget system that's evaporating faster than the polar icecaps.

Legislative Analyst Mac Taylor and his crack fiscal staff have set the marker for the next great deficit debate at $20.7 billion -- $6.3 billion in the current fiscal year and another $14.4 billion gap in the year beginning next July 1.

And Taylor, who's quickly gaining a reputation for telling the ugly truth to power, makes it clear that the current problem really lies at the feet of 120 legislators and Governor Arnold Schwarzenegger. "The vast majority" of the current year problem, says his new summary, "can be attributed to the state's inability to implement several major solutions in the July 2009 budget plan."

Of course, the real question is whether anyone actually thought those solutiuons would ever be implemented, or were the result of a bipartisan unwillingness to make enough tough decisions.

The LAO report says more than $3 billion of the current year problem -- almost half -- is due to missed budget solutions. That includes $1.4 billion of prison spending that wasn't slashed; $900 million for Medi-Cal programs that budget writers thought could be saved, in part, through federal funds; and more than $800 million lawmakers wanted to borrow from public transit funding... denied by the courts. And that doesn't include the highly suspect plan to raise $1 billion by selling off part of the state's workers compensation insurance fund, a plan now all but officially dead.

However, not all of the red ink can be blamed on elected officials. In another example of mysterious ballot initiative workings, the LAO report says the state's shrinking revenues actually translate into an extra $1 billion for public schools, thanks to the complicated system created by voter-approved Proposition 98. In a nutshell: Prop 98 ties school funding, in part, to year-to-year changes in state revenue. But the year-to-year changes projected by this year's budget deal ended up being wrong, making it seem as though revenues are growing faster than projected, thus guaranteeing schools more money. Remember, this is contrary to reality, where revenues are actually declining. Nonetheless, you can expect education advocates to demand that $1 billion ASAP, given the budget reductions to schools over the past two years.

And it's also a bleak future being painted by Legislative Analyst Taylor. His report projects $20 billion deficits for the four years after a new state budget is crafted next year, peaking at $23 billion in 2012-13 when Sacramento lawmakers must find a way to pay back local governments for the tax revenue borrowing in this summer's budget deal.

So what do such big budget holes mean? Here's one example: the report says the projected deficits in the next few years at the $20 billion level assume a freeze of most state worker salaries for another six years (after last being raised in 2007).

As for the budget debate that will begin in January, the Legislative Analyst reports there will be even fewer options than in years past. That's largely because federal stimulus dollars, vital to keeping California afloat, require state funding of education and health care at levels that are pegged to budgets of the past -- funding that Sacramento lawmakers can't cut if they want to keep getting DC dollars.

There's no doubt the winter and spring budget debate of 2010 will be fierce. Look for both liberals and conservatives to demand that now is the time to either tax, or cut, more.

Others will demand a revisiting of costly deals of the past. On Tuesday, California Teachers Association President David Sanchez told reporters that the cuts have to end. "There is no more to cut from our schools," said Sanchez. Instead, he argued lawmakers need to reexamine billions of dollars in tax credits, including some of the credits made available to big business in last year's budget deal. (His comments came before the apparent $1 billion in owed school funding mentioned above.)

"Large companies must pay their fair share," said the CTA leader. And the politically powerful CTA could, if it so chooses, make that point at the ballot box; two separate ballot measures are now on the table to nix some of those business tax breaks, which are worth a few billion dollars a year in lost tax revenues. And the teachers union also has submitted a couple of proposed initiatives to modify the iconic Proposition 13, allowing higher property taxes on commercial property.

[Look for an updated post later with reaction to the LAO report as it comes in..]

A new analysis of Governor Schwarzenegger's revised budget suggests that the deficit could end up being as large as $24 billion by July 2010, forcing even more severe choices by lawmakers over the next few months.

Legislative Analyst Mac Taylor released his new report this morning, and estimates that even if all of the governor's budget ideas are adopted, California faces a shortfall in excess of $15 billion the year after next. As a result, he says long-term planning is a must.

But the LAO also takes aim at about $6.5 billion of Schwarzenegger's solutions -- most notably, the plan to borrow $5.5 billion in what are normally cash-flow loans... not budgetary loans.

"It would set a terrible precedent for state finances," says Taylor's report on what's called RAW (revenue anticipation warrant) borrowing. Taylor says there are serious legal questions about the plan, and that legislators should look towards more certain solutions.

The report is here. More on the analysis after Taylor's news conference this morning...

On this morning's edition of The California Report, we presented the first of two stories examining the details and ramifications of Proposition 1A.

A close examination of Prop 1A finds it's neither the tight spending cap nor ultra-prudent rainy day fund it's often made out to be. As often is the case in politics, the truth is a little more complicated.

Let's start with the spending cap. Actually, it's probably not best called a "cap." Or a spending "limit." We finally settled on calling it a spending "constraint."

Prop 1A features a rolling 10-year look at general fund revenues, using a complex "linear regression" formula that would be enshrined in the California Constitution. That formula then spits out a revenue number which serves as what could be called a spending "threshold" for the fiscal year to come.

Revenues from existing law that are above that threshold would go into the reserve fund. Notice the italics, though... existing law. Why make the distinction?

Because the Prop 1A formula-derived "threshold" does not prohibit the Legislature and governor from approving a tax increase -- a new law -- and spending that extra money immediately. That assessment comes directly from an interview last week for our radio story with Legislative Analyst Mac Taylor.

It's not a small issue. Take, for example, a recent spat between conservative Republicans and the campaign to approve all six measures... a spat that led to a document circulated in support of Prop 1A that says, in part:

Indeed, if spending is already at the revenue cap, a tax increase would be difficult to justify since the proceeds of the new taxes would be deposited in the reserve.

Taylor and his staff at the non-partisan Legislative Analyst's Office say that's not the case. And they point to one of the final paragraphs in the measure, which says that any change in law (in this case, a tax increase) "that affects General Fund revenues for less than the entire period of the 10 preceding fiscal years" is excluded from the formula-generated threshold. Thus, say analysts, a new increase in taxes wouldn't be revenue that counts towards -- or is governed by -- the threshold.

In practical terms, this probably isn't much of a loophole in the near future. After all, it's awfully tough to raise taxes due to the required two-thirds vote needed in each house of the Legislature. In fact, this winter's budget deal included the only tax increase in recent budget memory. That's probably why GOP supporters are calling Prop 1A a "hard spending cap."

But suppose Democrats continue to push for a constitutional amendement to allow a tax increase with a simple majority vote? Or, also possible... suppose Democrats pick up another few seats in each house to become a supermajority? Perhaps that's why Democratic leaders are trying to assure their side that it's not a spending cap.

Jon Coupal of the Howard Jarvis Taxpayers Association calls that section "the biggest loophole of all."

Meantime, it's important to consider what the spending "constraint" in Prop 1A would do to General Fund spending in years when lawmakers don't agree to raise taxes... which is probably most years. Or, better said, what it doesn't do.... and that's is modify any of the other constitutional spending guarantees on the books, the biggest being the Proposition 98 school funding guarantee.

Because school spending can grow at a different -- and possibly faster -- rate, there's a chance that public schools would begin to consume a larger portion of revenues under Prop 1A that are left for spending, after a portion of revenues are diverted to the reserve fund.

"That means a squeeze for the parts of the budget that aren't earmarked or protected," says Jean Ross of the California Budget Project. Those areas include the UC and CSU systems and social services programs.

"I don't think there will be those unintended consequences," counters Senate President pro Tem Darrell Steinberg, a leading supporter of Prop 1A. "And if there are, [lawmakers] will fix it."

In an interview last week, Steinberg was especially upbeat on Prop 1A's reserve fund, which he called a "responsible" way to plan for the future. The reserve fund is the proposal's other big element. But here, too, the rhetoric seems somewhat misleading.

Tops on the list is the term "rain day fund," challenged by opponents in court... but left in by the judge (who forced other changes).

It's true that the proposition would direct 3% of General Fund revenues into a reserve fund (more in years with a windfall of tax revenues). But it's also true that half that amount -- equal to 1.5% -- could just as quickly be spent.

That half would have to be spent on specific things: either K-14 education in the immediate future (if Proposition 1B passes) or on infrastructure and bond debt. Still, that leaves only about half of the new reserve fund to truly be socked away for a "rainy day."

There are many other issues to consider about whether Prop 1A is a good idea, not the least is the fact that it simply adds another layer of so-called "ballot box budgeting" on top of other measures previously enacted by voters.

But one of the biggest parts of the Prop 1A effect -- the large tax increase that goes into effect if it passes --isn't actually in the measure itself. Still, it's a huge part of the political campaign... and will be the focus of part two of our radio reporting tomorrow.

That's what Governor Schwarzenegger said today about efforts to find precise estimates in both how much money California is getting from the federal stimulus package... and... how much of that money counts toward whether officials can pull the so-called budget "trigger."

Today's report from Legislative Analyst Mac Taylor takes a broad look at California's share of the federal stimulus pie. But it also addresses the specific issue of how much DC cash counts in the decision to either stick with... or scrap... about $948 million in budget cuts and another $1.8 billion in tax increases.

To "trigger off" those actions, the February budget agreement says California must be able to count $10 billion towards deficit relief between now and July 2010. And the LAO report reaffirms the official position of the Schwarzenegger administration: namely, that only about $8 billion of stimulus cash appears to count towards deficit relief. And that wouldn't be enough to pull the "trigger."

But the LAO presentation, during this morning's hearing of the Assembly Budget Committee, certainly didn't sound definitive when it came to the $8 billion estimate. "This was our best kind of shot at it," said Taylor.

Taylor and his staff said that they believe most of the $8 billion (actually $7.96 billion) is money available to offset state dollars spent in Medi-Cal services.

But when the question and answer session from legislators wrapped up, it was clear that a feisty debate is brewing as to whether to count more federal stimulus money towards deficit relief... thereby allowing some of the cuts and taxes to be set aside... or let the budget package stand as it is.

"I think taking for granted the $8 billion figure," said Assemblymember Mike Feuer (D-LA), "is a big mistake." Feuer went on to say that the Legislature should try to reach the magic $10 billion figure "any way we can," thus maximizing federal matching dollars that state government has often left unused.

But others said that pulling the trigger could only make the state budget's long-term problems worse. "Next year, and the year after, when we don't get that [one-time federal help]," said Assemblymember Diane Harkey (R-Dana Point), "we are still stuck, going like this with [state budget] expenses."

And still other legislators raised the question posted on this blog yesterday: what happens next week if the governor's budget director, Mike Genest, and Treasurer Bill Lockyer disagree on how much money to count towards the budget's "trigger" solutions? Exactly which federal dollars is the budget deal referring to when it sets $10 billion as the "trigger" threshold? And might a new drop in already anemic state revenues allow more federal money to be drawn in and used for K-12 education... thus getting the deficit relief estimate up to $10 billion?

"The [budget deal] language leaves some room for interpretation," said Legislative Analyst Taylor.

Which means next week's Genest-Lockyer meeting will be worth watching.

One final note: it's worth pointing out that before the budget deal was inked in the wee hours of February 19, the federal stimulus "trigger" amount legislators had penciled in was $9 billion. In other words, they were poised to write into law a lower threshold for rescinding some of the spending cuts and tax increases.

So what happened? For part of the answer, here's a quick quip from Governor Schwarzenegger today in remarks to reporters outside the Capitol:

What he's referring to: in exchange for the 27th and final vote in the state Senate for the budget from Sen. Abel Maldonado (R-Santa Maria), legislative leaders agreed to scrap plans for a 12 cents-per-gallon increase in the tax on gasoline.

Estimated value of that rejected tax increase over the next 17 months: $2 billion. Amount by which estimates now suggest the state will miss the chance to "trigger off" some of the budget solutions: $2 billion.

More on the overall LAO report, by the way, tomorrow morning on The California Report.

[NOTE: Earlier version of this posting pegged the original trigger amount at $8 billion. The paragraph in question has now been edited to reflect that the estimate was actually $9 billion. Regrets. --JM]

The nonpartisan budget guru (relied on by those of us in the press corps as the annual budget battle equivalent of Switzerland) says that Schwarzenegger's plan is a little too reliant on borrowing and a little too vague on how to achieve some of the projected savings.

First, the borrowing. The LAO says about $1 of every $5 of the governor's deficit solutions is achieved through borrowing. That includes about $5 billion in costly revenue anticipation warrants (RAWs) that would be sold to Wall Street investors, and about an equal amount (in the short term) of borrowing against future revenues from the California Lottery. Those two big requests from the financial markets are on top of what the LAO says is another $13.3 billion needed from lenders/investors to make the books balance.

Taylor's analysis (read it here) also points out that the governor hasn't defined some of the ways he proposes to save money, like a $334 million savings in money spent on services for the developmentally disabled. "The budget provides no specifics as to how these savings would be achieved," the report states.

So what does the Leg Analyst suggest? First and foremost, the report calls for swift action to set the date of the anticipated special election; you'll remember that last September's budget deal included two items to be approved by voters, but no date was formally set. The conventional wisdom is that the election would be held on June 3 of this year... but the Legislature has yet to set the date. The LAO recommends more items be placed on that ballot to save money, including one Schwarzenegger vetoed in September's budget deal -- a call to voters to amend the guv's 2002 initiative on after-school programs, Proposition 49. The LAO says voters should also be asked for approval to borrow against gas tax revenues to speed up needed transporation projects.

Today's overview probably isn't big news, but it does seem to point out just how much work remains to be done. As such, the report is probably a good starting place for the Big Five meeting scheduled for this afternoon between the governor and legislative leaders.

Not that they've asked for my advice.

[update 12:50 p.m. -- Taylor highlighted two other things worth noting in his Q&A with Capitol reporters this morning. First, his office believes there could be serious legal issues with the Schwarzenegger plan to use those RAWs to help solve the budget deficit. Taylor says that appears to be taking what's traditionally been a cash flow device (RAWs are almost like a bridge loan), and making it a budgetary device... which might run afoul of 2004's Proposition 58, the balanced budget amendment championed by the guv.

And second, the LAO is recommending legislators call the all-budget-all-the-time special election for late April, rather than wait for June. That's certainly going to get tongues wagging among county registars, the people who actually conduct elections. State law traditionally sets the deadline for calling an election at 131 days in advance. The LAO suggestion would shrink that to probably less than 100 days. It should be noted that legislative staffers believe they could make the decision as late as 80 days before election day.]

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.

This morning's report by Legislative Analyst Mac Taylor finds a state budget meltdown that certainly would rank among the very worst ever seen, if the numbers hold up: an almost $28 billion shortfall in revenues over the next 18 months, and... perhaps even more stunning... annual shortfalls in the range of $22 billion after that.

Granted, these are only projections and they do not account for the implementation of solutions. Still, the estimates are almost certainly going to cause a dramatic increase in tensions inside the Capitol, both during the lame duck special session and once the new Legislature convenes next month.

This is the first official report produced under new analyst Taylor, and it's a doozy.

"The state's revenue collapse is so dramatic and the underlying economic factors are so weak that we forecast huge budget shortfalls," says the opening summary of the report.

The LAO agrees for the most part with the recent analysis of Governor Schwarzenegger's finance team (though they feel the immediate gap is slightly larger), and finds his proposals for both tax increases and spending cuts "balanced."

The report also finds a worsening situation on the spending side of the state budget ledger. Chief among these is a loss of approximtely $1.5 billion in property tax revenues over the course of three fiscal years -- thus increasing state government's responsibility to funding public education. Tacked on to that are unexpectedly high caseloads in social services programs; the still lingering cost of fighting recent wildfires across California; and... not surprising to nonpartisan budget watchers... a lack of actual savings from so-called "unallocated" spending reductions penciled in to make previous budgets balance.

There's much more in the report, which will be discussed by Taylor at an afternoon news conference. And it will no doubt be the shot heard 'round the Capitol this morning... an affirmation that the challenge that lies ahead is unlike any other legislators or the governor have faced.

In the immortal words of Bette Davis: "Fasten your seatbelts. It's going to be a bumpy night."