Budget Forecast: State Faces $8B in Lost Revenue

SACRAMENTO, Calif. -- The recession will take an $8 billion bite out of California's finances next year unless Gov. Arnold Schwarzenegger and lawmakers make more spending cuts or close some tax loopholes, the state's leading budget analyst said in a new report Friday.

Despite a budget deal last month that was meant to close a $42 billion deficit through June 2010, the Legislative Analyst's Office said the state continues to bring in lower revenues than expected.

The grim news suggested another round of budget fighting in the Capitol, just weeks after Schwarzenegger and legislative leaders hammered out a hard-won compromise that closed the gap by cutting $15.8 billion from state programs, raising $12.8 billion through tax increases and borrowing billions more.

"Unfortunately, the state's economic and revenue outlook continues to deteriorate," Friday's report said. "Even in the few weeks since the budget was signed, there have been a series of negative developments."

Legislative Analyst Mac Taylor said the state's higher unemployment rate, now at 10.1 percent, further declines in the stock market and lower tax collections led to lower revenue projections in just a few weeks.

State Controller John Chiang also said this week that February revenues were nearly $1 billion below previous projections.

The LAO's report indicated the additional revenue loss will create a $6 billion deficit in the new fiscal year that starts July 1, plus $2 billion that is needed for a cash reserve.

Unless Schwarzenegger and lawmakers take action, Taylor said the deficit will grow to $12.6 billion in 2010-11.

"Our year of shared sacrifice is not over," Assembly Budget Committee chairwoman Noreen Evans, D-Santa Rosa, said in a statement. "As grim as it is, this forecast is not even the worst-case scenario facing California. We must be prepared for more bad news to come."

The forecast also assumes voters approve all six budget-related measures in a May 19 special election. The budget compromise relied on passage of those measures, which seek to impose stricter spending restrictions, extend temporary increases in the state's sales and income taxes, borrow $5 billion against future lottery profits, and transfer money from special funds dedicated to early childhood development and mental health.

"Clearly, as far as looking at our fiscal situation, the passing of those measures are pretty critical in improving the state's fiscal situation," Taylor said Friday. "If they don't pass, it's going to be a lot more work."

The downbeat report forecast double-digit unemployment rates continuing into early 2010 followed by slow growth that won't be nearly enough to cover future multibillion-dollar budget gaps.

Taylor recommended the state use as much federal stimulus money as possible to protect education programs and consider a mix of further spending cuts and revenue increases to solve the budget deficit without raising taxes.

His report suggested eliminating sales tax exemptions on animal feed, timber equipment and some medical items, as well as reducing credits for senior care. It recommended ending business tax exemptions on employer-provided parking, small business stock sales and corporate property trades.

The governor's finance department spokesman, H.D. Palmer, did not immediately return a phone message seeking comment on the report.

Also Friday, the Schwarzenegger administration launched a Web site, www.recovery.ca.gov, dedicated to tracking how federal stimulus money is spent in California. The legislative analyst has projected California will receive $31.5 billion from the bill and billions more in competitive grants.

The budget passed last month addressed the current and next fiscal years. It reduced 2008-09 general fund spending to $94 billion from $101 billion, and allocated $92.2 billion in 2009-10.