Budget Looks Far Brighter Than Expected

Just a few short months ago, Gov. Gray Davis took office bemoaning a projected $2.3-billion gap between the state’s spending needs and the amount of tax money expected to flow to the Capitol.

As a result, Davis warned, there would be no significant increases for programs other than schools in the next fiscal year, which starts July 1. Even state workers, his close political allies, could expect little by way of a raise.

But now, wars and economic woes in other parts of the world notwithstanding, California’s budget officials, seeing the state’s economy clicking along nicely, no longer talk darkly about a budget shortfall.

“It’s tough to say until we add up the numbers,” said Tim Gage, director of the Department of Finance. “Certainly the news on the economy is positive.”

California’s budget is, in essence, an economic indicator. As long as people have jobs, they pay taxes. The more that people work and receive raises and bonuses, the more taxes they pay.

The final numbers will not be known until May, when tax collectors total the income taxes that Californians pay by April 15. But every indication is that there will be more than enough money to keep Sacramento green.

Income taxes make up the single largest source of government money, about $30 billion for the next fiscal year.

And according to the Department of Finance, which oversees the $77.5-billion state budget, California, with 13.8 million jobs and growing, has experienced the 33rd consecutive month of record high payroll employment.

Gage noted that the money the state receives from income taxes withheld from people’s paychecks is up 10% to 12%. “The most recent revisions to employment seem to indicate that there is more strength than we thought,” Gage said of the state’s employment growth.

Also, the value of new construction rose 21.7% in the last year. Sales of existing homes increased 11.6%. Home prices rose 6.2%, the Department of Finance reports.

To carpenters or real estate agents, that means good economic times. That is also true for Sacramento, where such growth translates to more sales taxes, the second-largest source of state revenue at about $20 billion. Sales tax revenue is about $58 million above projections so far this fiscal year.

Money from state taxes on bank and corporate profits, the third-largest source of state revenue, was forecast to bring in $6.3 billion. Revenue from this source is down by $57 million.

But overall, the Senate Budget Committee estimates, all tax collections are running about $75 million above projections.

The real tale will be told when state authorities count up taxes paid on capital gains from the sale of stocks. Budget experts have attributed big surpluses of recent years to capital gains bonanzas.

There is cause for optimism, given the stock market’s continuing rise. However, government finance experts have devised no way of accurately predicting tax revenue from capital gains.

The budget situation could be complicated by higher than expected enrollment in public schools. Unanticipated enrollment growth of 60,000 to 90,000 pupils could cost the state an additional $225 million to $335 million, the legislative analyst’s office recently reported.

But at the same time, according to the report, local property tax collections will rise $70 million over previous estimates. Much of that money goes to schools. The rise in property tax collections is yet another reflection of an expanding economy, as more homes are built and home values rise.

Davis has already spent some of next year’s money. He struck contracts granting state workers 5.5% pay raises effective in April. In the 1999-2000 fiscal year, those raises will cost the state about $280 million.

If more money becomes available, Davis has said, he will spend it on public schools, increasing the state’s reserve for emergencies, public works projects, and a new round of raises for state workers. Exactly how much more Davis will spend will become clearer May 13, when the governor releases his revised budget.

“We’re waiting to see what April revenues are,” Gage said. “We’re hopeful there will be more money.”