More pain, despite modest good news

APRIL 12, 2010


State officials have been optimistic about the state controller’s March cash receipts report that provided good news about burgeoning sales-tax revenues, but the Legislative Analyst’s Office released a letter today — the same one provided to legislators on March 19 — warning that “it is unlikely that increased revenues will allow the state to avoid making the types of very difficult budgetary decisions for 2010-11 that we have identified as necessary in our recent publications.”

The good news is that the state received $1.2 billion more revenue this year than last year thanks mainly to sales tax increases. As the Sacramento Bee reported Monday, “The cash registers are starting to ring again in California,” thanks to new retail spending. One analyst argued in the Bee report that the federal tax cuts are boosting spending in California, even though the state is still mired in a deep recession with a 12.5 percent unemployment rate.

“Year-to-date receipts are ahead of budget estimates by $1.94 billion, or 3.9 percent,” according to the controller’s statement.  “The state’s cash position was $2.15 billion ahead of projected levels on February 28.” Controller John Chiang suggests that the worst of the recession may be past, although he warns that “we still face cash challenges later in the summer absent enactment of further credible and sustainable budget and cash solutions.”

Legislative Analyst Mac Taylor detailed the following reasons for caution in regards to the economy and the overall California budget situation:

  • “We expect the lingering effects of the bursting of the housing bubble and the subsequent financial crisis to continue to dampen growth in California. In particular, relatively weak demand for new residential and commercial construction are leading us to have somewhat lower expectations  of growth in the out-years compared to our previous economic forecasts.”
  • “We are concerned that the higher monthly revenue levels are not entirely consistent with the underlying economic indicators.”
  • “In considering how new revenues may affect the size of the state’s budget problem, it is important to keep in mind that a large portion of each additional dollar in new state revenues will be required to go to current-law Proposition 98 school funding obligations. Specifically, we estimate that up to about 60 percent of the newly identified revenues above our current forecast will be required to go to these Proposition 98 obligations. While this helps schools, it means that ‘new’ revenues provide much less budgetary solution than on first blush.”

Still, the good news means that California is estimated to have a $19 billion budget hole rather than the $21 billion deficit previously projected. Many observers fear that legislators will see the new economic and budgetary improvement as reason to delay substantial reform, as they wait for the state to “grow” its way out of its budgetary shortfall. Here is Taylor again: “The state continues to face a stubborn annual gap between current-law revenues and expenditures of about $20 billion for each year through at leat 2014-15. The Legislature still faces incredibly daunting challenges in balancing the budget this year.”

The state still faces tough times ahead, despite the unexpected good news.

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