Bettering Economy Eases State Budget Woes For Now
By LAURENCE DARMIENTO
What happened to California’s budget crisis?
Just this summer, the governor and Democrats in control of the Legislature locked horns over a $105.3 billion budget that papered over a long-term structural deficit by borrowing.
Yet in the past month, two Wall Street ratings agencies have given thumbs up to the state, raising its credit ratings from near-junk status. The agencies cite not only the budget pact but California’s improving economy.
Since the start of the fiscal year on July 1, the state has raised $232 million more in revenue than was projected by the Schwarzenegger administration, according to the state Department of Finance.
The extra revenue won’t close a $5 billion budget hole projected for the 2005-2006 fiscal year. But the figures could revise policymaking and political strategies if economic growth holds up.
“When you look at these numbers there are clearly signs of a turnaround,” Finance Department spokesman H.D. Palmer said. “It is much different and welcome data.”
Overall, the state is getting 2.4% more general fund revenue than it had expected through Aug. 31. But the gain isn’t across the board. Personal income and corporate tax receipts are up, while sales tax receipts fell in August after rising in July,not surprising given August’s weak job figures.
There still are skeptics.
“The California economy is doing nominally better than that of the country, but nationally the economy is not performing at the point you would expect in an economic recovery,” said Jean Ross, executive director of the California Budget Project, a left-leaning public policy think tank.
Wall Street Pleased
Even so, the economic growth was enough that Standard & Poor’s and Fitch Inc. cited it as a key reason for raising the state’s bond rating.
S & P; moved the rating to A from BBB on Aug. 24. Fitch raised it to A-minus from BBB on Sept. 8. The actions followed a similar move by Moody’s Corp. in May as long-term bonds removed any chance the state would fail to meet its short-term debt obligations.
The upgrades ensure the bonds retain investment-grade status. But California still is the lowest-rated state in the nation because of its structural budget deficit.
“The economy doesn’t translate into structurally balanced operations,” said Ruth Corson, a Fitch analyst who believes the state must either cut spending or raise taxes to alleviate the problem.
Raising taxes is something the governor has been loath to do. Schwarzenegger instead has been counting on a recovery and a proposal to rework the state bureaucracy. The administration also plans to release a proposed overhaul of the Medi-Cal program in January.
The economy is helping out. If the state were to have revenue continue to come in at the current rate, it would put a dent of at least $1 billion in a projected $5 billion budget gap next year.
One contributor has been personal income growth, which translated into a 0.7% increase from projections, to $4.9 billion in revenue raised from personal income taxes in July and August. The figures are somewhat perplexing because the state economy added jobs at a much lower pace in August than the national economy.
Economist Stephen Levy, director of the Center for the Continuing Study of the California Economy, thinks the personal income gains might by attributable to capital gains taxes paid by investors cashing out of the recent stock market rally.
But Howard Roth, the Finance Department’s chief economist, believes workers may be putting in more overtime.
“I do think that some of that is option income, but some of it can be people working longer,” he said.
More impressive is the revenue raised from corporate taxes, which exceeded projections by 29.5% in July and August, to $487 million.
This growth, while having less of an impact than personal income taxes, is consistent with the general improvement in other economic sectors, including goods exported to other states and countries. The value of exports produced here hit $27.4 billion in the second quarter, up 13.9% from a year earlier.
Also booming is the state’s construction market. The value of non-residential building hit $17.5 billion in June, a 29.7% gain from a year earlier and the highest level since August 2001. That figure tapered off in July to $16.2 billion.
Crystal Ball
Brad Williams, chief economist for the non-partisan Legislative Analyst’s Office, cautioned against extrapolating two months of improved revenue figures to the entire fiscal year. Much of the increase comes from ancillary increases, such as license fees and oil royalties, he said.
Williams is projecting that the state’s budget deficit will exceed the governor’s $5 billion estimate by at least $1 billion.
There also is the question of the strength of the overall economy. The UCLA Anderson Forecast this month raised the possibility, however slight, that a recession might hit in the next year or two.
Finally, there is the precarious structure of the state budget. While the 2005-2006 deficit might hit $6 billion, the following year it could rise to $10 billion or more. The current budget, as well as next year’s, is being helped out with borrowing from local governments and schools that will need to be repaid.
“There is just complete shortsightedness up there (in Sacramento) that I don’t understand,” said Chris Thornberg, a senior economist with the Anderson forecast.
Darmiento is a staff writer with the Los Angeles Business Journal.
