State Budget Threatened by Slow Economy

A 6.4% drop in anticipated state tax collections for September, along with the unexpectedly high loss of 240,000 jobs during the recession, led the state treasurer on Thursday to admit that California’s economic troubles are much worse than previously thought.

Kathleen Brown, pulling back from her earlier optimism, told Gov. Pete Wilson in a letter she released that revised budget figures from the Commission on State Finance will show that the state “has been through a deeper recession than previously thought,” making it tougher for the economy to bounce back.

California tax collections for September fell $245 million below budget projections. And, as other reasons for her more pessimistic assessment, Brown cited softness in the real estate and construction industries, as well as a mid-September update from the Employment Development Department showing the state lost 240,000 jobs during the recession, almost seven times higher than the previously estimated 35,000 lost jobs.

The numbers confirm fears by a number of top state officials that Wilson and the Legislature could face another big deficit when lawmakers return to the Capitol in January. This would trigger another fight over whether to raise taxes again or cut state spending even more.

September’s biggest drop-offs were in personal income tax and bank and corporation taxes. Sales taxes were up, but not as much as had been expected in the wake of July’s 1 1/4-cents-on-the-dollar sales tax increase.

The governor and Legislature spent much of this year struggling with a projected $14.3-billion deficit that was an outgrowth of last year’s budget shortcomings.

They hoped they had solved the problem with a July budget agreement that required more than $7 billion in tax increases, and a comparable amount of budget reductions, spending freezes, accounting transfers and other actions designed to save money. But even then a number of lawmakers were predicting that the budget agreement would not be enough to head off another deficit.

Brown’s assessment was backed up by state Controller Gray Davis, who said tax collection figures gathered by his office show that “the California economy is still coughing and sputtering.”

Wilson’s budget analysts still have not released the official tax collection figures for September. But Cynthia Katz, assistant finance director, said tracking by the Department of Finance indicates basic agreement with Brown’s figures.

“The economy is not performing as strongly as we thought it would,” Katz said.

The current year’s $55.7-billion state budget had anticipated a $1.2-billion reserve at the end of the budget year next June 30, so the state currently has enough to withstand the one-month drop, Katz said.

But she and other officials warn that if tax collections continue to run below projected levels, another budget deficit could develop.

Davis’ report showed that major tax collections during September were also $73 million below the amount collected in September, 1990, despite last summer’s tax hikes. “Any talk of an economic recovery is premature at best,” he said.

The Democratic controller also released an update on jobs within state government that shows the number of vacancies has grown to 21,126 as a result of a budget-related hiring freeze, an increase of 903 vacancies in one month.

With Wilson Administration officials locked in bitter collective bargaining talks with state employee unions, civil servants have been closely monitoring the number of vacancies. They say that with the large number of vacancies, the governor does not need to impose a threatened 5% pay cut to go along with roughly 3,000 planned layoffs.

“This is just further evidence that the governor is off base,” said Perry Kenny, an official of the California State Employees’ Assn.

Franz Wisner, a spokesman for Wilson, said the Administration believes Davis is exaggerating the number of vacancies.

While the number of job vacancies somewhat relieves the budget strain, Katz said two huge categories of welfare spending--the number of persons enrolled in the Aid to Families with Dependent Children program, and the costs of providing medical services to the poor--are already higher than expected.

Katz said welfare caseloads had been expected to increase by 8%, but during July and August were up by 12%, though she cautioned it was too early to tell whether the increases would continue to run that high.