Budget Shortfall of $3 Billion Faced by State

Faced with a deeper-than-expected recession, which has cost 380,000 jobs statewide, state lawmakers were told Wednesday that they may wind up at least $3 billion short of meeting the $55.7-billion budget they passed in July.

The estimate of a $3-billion shortfall is based on a sharp drop-off in tax collections and higher-than-anticipated spending, particularly on health and welfare programs serving the poor.

But the prospect of another huge deficit was enough to prompt Assembly lawmakers from both parties to urge Gov. Pete Wilson to call the Legislature back from its recess to deal with the problem. The governor and legislative leaders spent much of the year wrestling with a projected $14.3-billion budget gap that they had hoped they had solved in July.

The $3-billion estimate was made by Kevin Scott, executive director of the Commission on State Finance, based on a decline of $344 million in tax collections during July, August and September. Scott said he expects tax collections to be off by $2.3 billion over the remainder of the fiscal year, which ends June 30. He also predicted that spending would be about $800 million higher than expected, largely because of increases in welfare caseloads and higher costs of providing medical care to the poor.

Assembly Speaker Willie Brown (D-San Francisco) said that if the numbers hold up, the state would face “a real potential disaster if we continue to spend at the level we are spending. . . .”

Brown and other legislators received a special briefing on the budget problems in the Capitol on Wednesday. Although about 50 Assembly members showed up for the briefing, they were unable to take official action because the Legislature will be in recess until January.

A spokesman for Wilson said the governor had no immediate plans to call the lawmakers back to Sacramento. Dan Schnur, a Wilson press aide, said: “Clearly the state’s fiscal situation requires attention. We know urgent measures may be necessary, but at this point we are still assessing the situation.”

Scott told the lawmakers that the combination of lower tax revenues and higher costs would eat up all of the $1.2-billion reserve projected in the current budget and leave the state with a deficit on June 30 of at least $2 billion. He said the problem could be even worse if Wilson is unsuccessful in forcing state employees to take a 5% pay cut or if the courts rule against the state in a case involving a reduction that lawmakers want to make in pension fund contributions for state workers.

Adding to the bad news, Scott said that in addition to the $3-billion problem this year, “the state could face an additional funding gap of a similar magnitude” during the next fiscal year.

Although some lawmakers anticipated financial problems developing before the year was out, other officeholders hoped a massive package of tax increases and spending cuts put together to close the $14.3-billion gap would keep the state solvent for at least three years.

When Wilson signed the budget in July, he said the spending plan represented “real solutions” to long-term budget problems. At that time, Speaker Brown was perhaps the most optimistic of all, telling a reporter, “I cannot see any need for reattention to the financing of the state of California, at least through 1996.”

Scott said tax and expenditures estimates that formed the basis of the $55.7-billion budget were based on a recovery from the recession that is not materializing as fast as state financial officials believed.

“The nature of the recession in California has changed from being modest to severe,” Scott told lawmakers.

He said estimates of a relatively mild recession were made last spring and were considered reasonable at the time because it was believed that the recession had resulted in the loss of 35,000 jobs. Thereafter, he said, estimates on the number of lost jobs jumped to 240,000 and, recently, to 380,000, based on figures compiled by the state Department of Finance.

Scott called the figures “startling” and said it meant that the current recession in California is worse than any economic downturn experienced since the post-World War II years.

“This is the steepest decline in employment in California since the state was trying to adjust to the postwar environment in the 1940s,” he said. Most of the decline, he said, has been in the construction industry, which lost 112,000 jobs. The manufacturing industry has lost 99,000 jobs, most of those in aerospace.

According to the Employment Development Department, the unemployment rate in California during September was 7.7%, compared to a rate of 6.8% for the rest of the nation. In Los Angeles County, the unemployment rate during September was 8.5%.

Scott was joined at the hearing by Legislative Analyst Elizabeth G. Hill, who refused to make a specific estimate of a potential deficit but told lawmakers the problem was serious and could grow much worse.

Hill said that during July, August and September, demands for welfare and health services were $250 million higher than budget projections.

Neither of the analysts was specific about when they thought California would begin to pull out of the recession. Scott said he believes that the recovery may begin anywhere from January to June, 1992.

The lawmakers, as a group, were unwilling to make any specific proposals, although several legislators, clearly in a minority, urged consideration of a repeal of some of the tax increases passed in July.

As part of the budget agreement to close the $14.3-billion gap, Wilson and legislators passed more than $7 billion in tax increases in June and July, including a 1.25-cent increase in the sales tax, reduced welfare grants, froze hiring in state agencies and took a number of other actions that they hoped would solve the problem.

If the $3-billion potential deficit holds up, a new round of budget cuts or tax increases would be needed to keep the state in the black.

About this time last year, the state faced a potential $280-million deficit. As the economic picture worsened, and lawmakers put off taking action, the problem grew, until finally it reached $14.3 billion. During the meeting Wednesday, Democratic and Republican lawmakers actually spent more time bickering about Republican staffers that were cut from the Assembly budget by the Speaker than they did discussing the budget. Republican legislators are angry over a net reduction of 11 GOP slots in the Assembly’s budget.