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A New Deficit in the Budget

by Indy, published

The least-surprising news of the past week: Despite months -- or was it years? -- of blood, sweat, arm-twisting and deal-cutting that led to February's budget deal to seal what was then a $42 billion gap, a new deficit has popped up.

That's according to a report by the nonpartisan state Legislative Analysts Office released Friday.

And as budget shortfalls are wont to do, analysts expect this gap to continue to grow if no action is taken -- to $12.6 billion in 2010-11, to $26 billion by 2013-14.

Those figures could prove to be unrealistically gloomy if the recession ends this year as Federal Reserve Board Chairman Ben Barnanke said Sunday it might. His scenario, though, was predicated on an even bigger "if" that involved healthy financial and banking systems. The immediate reaction to that statement was lower trading for the dollar in Asian markets, which apparently understood the enormity of Barnanke's "if."

On the state level, whether the Legislature and Gov. Arnold Schwarzenegger have even managed to close the $42 billion gap still is an "if" that requires voter approval May 19. If one or more of the budget measures -- a $6 billion combination of temporary tax increases, redirecting money dedicated to children and mental health and borrowing -- the state has an even bigger problem on its hands.

"If these measures were to fail, the Legislature would need to quickly develop even more solutions before the start of the fiscal year as alternatives." the LAO said.

What a great sense of humor. Officials took months to come up with the $42 billion solution. What are the chances they'll be able to reach agreement on a new one between May 19 and July 1 if the voters defeat the measures?

Anti-tax groups already are incorporating Friday's LAO report into their "defeat the propositions" rallying cry, using the new data as "evidence" that the state can't get the numbers right.

"Their campaign was based on a shaky foundation as far as credibility goes . . . and this isn't going to make it any better," Jon Coupal, president of the Howard Jarvis Taxpayers Association, told The Los Angeles Times.

Tempting as it is to mutter "a pox on both their houses" and blame the Legislature and Schwarzenegger for this, that's just not true.

"Unfortunately, the state's economic and revenue outlook continues to deteriorate," the LAO report says, quite correctly:

  • The state's unemployment rate rose from 8.7 percent in December to 10.1 percent in January. The national unemployment rate rose from 7.6 percent to a 25-year high of 8.1 percent in February. Some expect it to reach 9.4 percent nationally. Heaven help some California counties, where unemployment already tops 20 percent, if that happens.
  • The federal government reported that gross domestic product for the fourth quarter of 2008 fell at a 6.2 percent annual rate, worse than the expected 3.8 percent drop.
  • Receipts for the state's big three taxes (personal income taxes, sales and use tax and corporate income tax) were $815 million below the forecast for February.

With the exception of the last, which clearly is tethered tightly to the first two, those are national problems. Short of placing a McDonald's "hamburgers sold" style tote board atop the Capitol -- 16,531,800 now out of work! -- it's hard to see how the state could improve its projections.

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