California budget faces new $8-billion shortfall

The plan that Gov. Arnold Schwarzenegger and lawmakers approved last month to fill California’s giant budget hole has already fallen out of balance with a projected $8-billion shortfall, the Legislature’s nonpartisan budget analyst said Friday.

After analyzing recent data showing rapidly rising unemployment and lower-than-expected economic growth, Legislative Analyst Mac Taylor said the state is on track to have even less money than lawmakers anticipated in February.

State leaders said then that they had ended the financial crisis through $42 billion in lowered spending, increased taxes, borrowing and accounting shifts.

California’s economy in is such bad shape that Taylor’s office anticipates that residents’ combined personal income will be lower this year than it was last year, leading to fewer tax dollars for state coffers.

“I went as far back as 1950, and I could not find a situation in which personal income had actually declined in the state, so that’s a rather unusual event,” Taylor said at a news conference Friday.

The dour projection is likely to complicate Schwarzenegger’s effort to win voter approval for a package of budget-related ballot measures scheduled for a special election May 19.

The governor and legislative leaders have said the propositions -- which include controversial bids to extend the recent tax increases, borrow against future lottery proceeds and siphon money from popular programs for children and the mentally ill -- are necessary to restore the state’s fiscal balance.

For opponents, the new forecast is “going to give them a tremendous argument,” said Larry Gerston, professor of political science at San Jose State.

He noted that since last fall, Schwarzenegger and lawmakers have repeatedly announced that they have resolved the state’s financial troubles, only to see deficits rapidly reemerge.

“Their campaign was based on a shaky foundation as far as credibility goes . . . and this isn’t going to make it any better,” said Jon Coupal, president of the Howard Jarvis Taxpayers Assn., which opposes the special election measures.

H.D. Palmer, a spokesman for the state Department of Finance, noted that Taylor’s estimate was based on more recent data than lawmakers had in February when they crafted their rescue plan.

“We are continuing to work our way through a recession that has hit California’s economy extraordinarily hard,” Palmer said. “That means there is clearly a potential for the state’s revenue picture to get worse.”

The governor is scheduled to release a revised financial forecast in May, when the Capitol traditionally focuses on the state budget. Lawmakers tried to head off a summer budget fight this year by tackling the deficit early and writing a spending plan that would last through the middle of next year, but Taylor’s analysis suggests they will be forced to make major revisions this spring.

Assembly Speaker Karen Bass (D-Los Angeles) said the new estimate made it more imperative that voters approve the May ballot measures. If the package of propositions --particularly the lottery borrowing -- is rejected, the budget gap would increase by $6 billion, she said.

“We must keep a careful watch on revenues during these volatile times,” Bass said. “All of us, Democrats and Republicans alike, must be prepared to continue to make tough decisions.”

Assembly GOP leader Mike Villines, who supported the taxes and cuts passed in February, said the new budget hole would have to be plugged with further cuts if the economy does not recover.

Senate minority leader Dennis Hollingsworth (R-Murrieta) said he did not believe the three Republicans in his caucus who voted for tax increases would do so again.

“We’re going to have to find efficiencies and reduce spending on a lot of programs,” he said. “It’s very painful, but it’s going to have to be a very necessary step.”

Even though they are in the minority, Republicans can block any spending plan they don’t like, because of California’s requirement that budgets be supported by two-thirds of the Legislature.

Taylor said the new $8-billion budget hole should not be as difficult to grapple with as was the $42-billion gap. He said the state may be able to tap $3 billion in federal money intended to increase schools spending as part of the federal economic stimulus package passed by Congress.

“We’re not that far away if we can use those federal dollars,” he said in an interview.

That idea may not fly with California’s school leaders. Kevin Gordon, a lobbyist for school districts in Los Angeles, San Bernardino, Riverside, Orange and other counties, said Taylor was proposing to “hijack federal dollars that the president and Congress intended to use to offset cuts that have already been made.”

Beyond the short-term problems, Taylor also projected a grim long-term fiscal outlook for the state, with a $12.6-billion shortfall emerging by mid-2011 and growing to $26 billion three years later.

“Given these budgetary pressures, the state could experience recurring cash flow pressures in the coming months and years,” Taylor wrote.

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jordan.rau@latimes.com

evan.halper@latimes.com