State Analyst Sees Shortfall in ’99 Budget

California’s days of budget surplus are over and the state will be nearly $1 billion short of funds by next summer, the legislative analyst’s office predicted Thursday, casting a cloud over the early plans of Gov.-elect Gray Davis.

Citing Asian economic woes and turmoil in the U.S. stock market, the analyst said in a report that the state’s economic engine has slowed and will fall just short of the high expectations lawmakers adopted in their budget last summer--even though the state will continue to flourish and job growth will outpace the rest of the nation’s for several years.

That forecast, in the annual California Fiscal Outlook, is not universally shared: Finance officers for Gov. Pete Wilson said that although they are watchful, they believe conditions could rebound before the next fiscal year begins on July 1, 1999.

Still, the prospect of even a modest dip in cash raises significant questions about state policy.

It would end the chance of a second round of cuts to the vehicle license fee that are scheduled to take effect if the state continues to produce a surplus. It also looms ominously over Davis, who takes office Jan. 4 after a campaign that promised ambitious and sometimes expensive new ideas. In education alone, Davis wants $600 million per year for new books and more for computers, teacher training programs, college fee supports and other plans.

“The governor-elect looks at this as certainly cause for concern, but not alarm,” said Davis spokesman Michael Bustamante. He added that the chance of fluctuating economic conditions “really underscores the need for a wait-and-see approach.”

But the possible cash shortfall will have to be one of Davis’ immediate priorities, because he is required by law to issue his first budget proposal by Jan. 10.

The Legislature has until June to act on the governor’s plan and the final budget is scheduled to take effect July 1.

By then, Thursday’s report said, state coffers should be about $828 million below the level lawmakers expected when they adopted the current budget last summer.

In addition, the report warned that lawmakers have already saddled the next budget with nearly $1.6 billion in new costs such as phased-in tax cuts, teacher benefits and welfare training programs. The additional demands will contribute to another shortfall in 2000--perhaps about $1 billion--if existing policies are not adjusted, the report said.

“Current economic trends, while clearly more positive than a month or two ago, still suggest that Asia’s economic problems and mixed performance in the U.S. stock market will lead to more restrained economic increases than the [Wilson] administration assumed last May,” the report said.

Elizabeth G. Hill, the legislative analyst, told reporters at a Capitol news conference Thursday that the state economy remains strong overall. “I don’t think the [economic] rocket has crashed,” she said. “It has slowed.”

But Hill said concern about the global economy has already reduced business investment, with a particular impact on high-technology companies. She also said it has cut California’s foreign trade and dampened consumer confidence.

Hill said these conditions will reduce the revenue California had expected from personal income taxes. In addition, she said the projected budget shortfall also stems from Medi-Cal estimates that did not adequately anticipate the number of elderly--and more costly--patients.

Her annual report to the Legislature suggests that state projections are probably off by a mere 1%. But with a budget valued at more than $75 billion, that slight miscalculation would still translate to a shortfall of $828 million.

The shortfall would come out of the state’s cash reserve, a $1.2-billion account for emergencies. Hill said the state reserve would have about $331 million left for other emergencies or additional spending prior to July.

That could be bad news for state employees, many of whom have gone nearly four years without a pay raise and have pinned their hopes for raises on Davis. Hill said any new raises that take effect before July would have to come from the reserve.

But Wilson administration officials said that in the coming months, the outlook may prove less gloomy than Hill predicts.

The stock market has continued to rise recently, they said, suggesting that the state might benefit from more capital gains taxes than anticipated. The bulk of tax revenues to the state arrive in December and April--by far the two biggest spikes in the state’s annual cash flow.

Until then, state Finance Director Craig Brown said, economic conditions are too volatile for hasty conclusions.

“I think there is some truth to what they are saying,” he said of Thursday’s report. “But I think there will be . . . a big surprise in April and I don’t know what that will be. My guess is that it will be a pleasant surprise.”

If the state does face a budget shortfall, it will be a significant reversal from recent years when lawmakers have passed tax cuts, assisted cash-strapped cities and reduced school classroom sizes with the help of large surpluses. Last year alone the surplus exceeded $4 billion.

This year, the outlook is still so uncertain that Wilson officials were not prepared to rule out the chance of another surplus--although they were not optimistic either. Brown said most of the surplus last year was unexpected until a windfall in April.

Wilson was so confident of a surplus in the coming year that he gambled his cherished plan for a tax cut on it.

At the governor’s urging, lawmakers last summer spent $1.4 billion of the budget on a 25% reduction in the vehicle license fee. The reduction would grow to $3.6 billion by 2003--but only if the state continued to produce a budget surplus.

The cut is not authorized unless the surplus exceeds $1.5 billion by next June.

There are also other variables that might change the outlook.

Hill said she did not calculate the recent government agreement with tobacco companies that would produce about $25 billion over the next 25 years for California, about half of it designated for the state and half for local jurisdictions.

The accord is still tentative, but Hill said it could help the state’s long-term financial picture.