California's Record Deficit Threatens Services, Jobs, Economy
By David Dietz
San Francisco, Feb. 6 (Bloomberg) -- Officials in San Jose, California, spent five years developing a $300 million plan for housing, community centers and parking improvements that is now threatened by the state's record $34.6 billion budget deficit.
In San Bernardino County, which stretches across Southern California terrain the size of New Jersey, the libraries expect a 60 percent cut in spending for new books, to $800,000 from $2 million, said county librarian Ed Kieczykowski.
In Sacramento, the state capital, local school superintendent James Sweeney looks back three years to when California was flush with cash as he waits to find out how much money his district will lose.
``We were talking about $10 billion state surpluses, buying computers, doing all kinds of things,'' said Sweeney. ``It's absolutely incredible that in this brief amount of time we've gone from a $10 billion surplus to an astounding shortfall.''
Saddled with a budget gap triple the next largest state deficit, California's governor and lawmakers are considering raising sales, income and cigarette taxes while slashing services and jobs. Those steps will make it harder for the state to recover from a recession that has pushed unemployment to a six-year high of 6.6 percent, according to economists and officials.
``This is the most serious threat to recovery in California that I've seen in 25 years,'' said Susan Shick, executive director of the San Jose Redevelopment Agency.
By law Governor Gray Davis and the state legislature are required to balance expenses and revenue through spending cuts and tax increases. Their actions are being watched by companies that rate the credit-worthiness of state bonds.
Downgrade Fear
State officials are scheduled to meet in New York today with Moody's Investors Service and Standard & Poor's and tomorrow with Fitch Ratings. In December, S&P and Fitch downgraded California's bonds, driving up its cost of borrowing for capital construction projects such as school and roads.
Davis said in a Bloomberg interview last night that he believes the ratings companies shouldn't downgrade the state further.
``I think that they will see that I'm serious and that I've laid out a plan to protect the state from a budgetary and cash perspective,'' Davis said.
California is scheduled to sell more than $5.4 billion of municipal bonds through the end of the year, including a $900 million general obligation debt offering on Feb. 13.
S&P reduced its rating on the state's general obligation bonds a single level to A from A+, tying the state with Louisiana for the lowest credit rating. Fitch Ratings cut its rating three levels to A from AA, saying the deficit was ``deep and continuing.'' Moody's rates the bonds A1 after two downgrades in 2001.
Increased Premium
The state's 30-year bonds yield 3/10 of a percentage point more than AAA rated municipal debt, about double the average spread over the last 13 months, according to Bloomberg data. A 30- year bond that sold in October at 101.56 cents to yield 4.8 percent dropped to 98.74 cents to yield 5.08 percent in trading Monday.
``Investors are really looking for an indication of the political will of the state to solve this problem,'' said David Blair, a senior analyst in Irvine, California, for Nuveen Investments Inc., which oversees $46 million in municipal bonds.
Davis, a Democrat, and the state legislature, which is controlled by his party, increased spending 51 percent to $80.2 billion in fiscal 2001 from $53 billion in fiscal 1998 as revenue from personal and corporate income taxes surged in the Internet and technology boom.
Rise and Fall
In 2000, receipts from taxes on capital gains and cashed-in stock options soared to $17 billion, or 25 percent of the $67 billion general fund, from $7 billion, or about 13 percent of the general fund in 1998. The state pulled in $12 billion more than it needed to pay bills.
Since March, 2000, the Standard & Poor's 500 Index has fallen almost 46 percent and capital gains revenue has plunged 72 percent to $4.7 billion.
Across the U.S., states have amassed an estimated $94 billion of deficits through the budget period ending in mid-2004 because of falling tax revenue in an economic slowdown, according to the National Conference of State Legislatures.
After California's deficit, New York's shortfall over that period is the largest at $11.5 billion, followed by those of New Jersey, $5.7 billion, and Texas, $5.5 billion, according to the conference.
Davis has proposed $20.6 billion in budget cuts and $8.3 billion in tax increases. He also wants to defer payments to local governments and the state pension fund, raise student tuition at public colleges and increase fees paid by Indian casinos. He has valued those measures at $5.6 billion.
Spending Cuts
The spending cuts in the governor's plan include slashing $3 billion from a health insurance program for the poor and $3 billion from school spending, as well as firing 2,000 state workers.
He has asked the legislature to approve this month cuts that will be worth $5.4 billion when the fiscal year ends June 30. He said the action would limit the state's need to borrow to repay $12.5 billion in notes due that month.
Davis's tax proposals would add a penny to the 7.25 cents per dollar sales tax to raise $4.6 billion and would collect an additional $2.6 billion from people with annual taxable incomes over $272,000. An increase in the cigarette tax to $1.10 a pack from 87 cents would raise an additional $1.2 billion.
The legislature and the governor are at odds over elements of the plan. Republicans -- who hold 15 of 40 seats in the Senate and 32 of 80 Assembly seats -- have balked at the proposed tax increases.
Legislative Battle
``New taxes will not solve the problem,'' said Assembly Republican minority leader David Cox. ``They won't get people back to work, they won't create jobs and they won't get California out of this fiscal meltdown.''
Davis's fellow Democrats have said they would cut spending as long as the governor agreed to raise car registration fees by $4 billion to help cities and counties hurt by budget reductions. Davis said Tuesday that he would veto such a measure to avoid angering Republicans. He needs their support because tax increases and the budget require two-thirds approval in both the Assembly and Senate.
Sheriffs and police chiefs in the San Francisco Bay Area said Monday at a news conference that they needed the extra car- fee money to avoid firing officers, closing jails and cutting back on investigating minor crimes.
``I'm frankly at the end of my rope,'' said Alameda County Sheriff Charles Plummer.
Call for Change
Fourteen economists at public and private universities in California yesterday urged lawmakers to reduce the state's dependence on income taxes. They recommended broadening the tax base by extending the sales tax to services and amending Proposition 13, the 1978 measure that cut property taxes, to more evenly spread the burden between homeowners and commercial property.
``We should definitely be careful not to lose sight of the longer-term reforms'' needed to avoid chronic deficits caused by economic and stock market swings, said Alan Auerbach, director of the Robert D. Burch Center for Tax Policy and Public Finance at the University of California at Berkeley.
Former Governor Pete Wilson filled a $14 billion gap in 1992 with temporary tax increases and spending cuts. Former President Ronald Reagan, who was California governor from 1967 to 1975, was booed at an Oakland Athletics baseball game in 1968 because he agreed to close a gap equal to 16 percent of the state budget with the largest tax increase in state history.
Economists said that the only options open to California in balancing its budget -- cutting spending and raising taxes -- will further crimp its economy. They also said California can't depend on economic growth to help close the budget gap.
The state has registered job losses in three of the last four months. Officials also predict some technology-related jobs may never return because companies are seeking lower labor costs by manufacturing in China and elsewhere.
``We shouldn't assume even with recovery that these problems are going to go away,'' said Janet Yellen, an economist and business professor at the University of California at Berkeley.
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