Thriving Economy Keeps Money Pouring Into State Coffers

Not too many years ago, word that California faced the prospect of having to pay out hundreds of millions of dollars in court judgments would have cast a pall over state budget writers.

But although the state indeed may be forced to fork over big money next year, Sacramento’s bean counters are seeing green again in 1999, turning the harsh economic times of the early 1990s into an even more distant memory.

Most economists thought California’s economic expansion would slow this year. But so many people have jobs, are receiving raises and are buying cars and other goods that state tax revenue is up $500 million through October over what was forecast only four months ago, the state Department of Finance and the legislative analyst’s office say in separate assessments.

“It bodes well for the budget, no question about that,” said Brad Williams, the legislative analyst’s chief economist. “The revenue trend is significantly stronger than expected.”

A more accurate barometer of the state’s economy heading into 2000 will come later this month when the legislative analyst provides a detailed assessment of projected revenue and compares it to looming costs.

But as Gov. Gray Davis prepares to fashion a budget proposal to be released in January, he can expect to have a second flush year.

“Revenue is up. The economy looks positive,” said Department of Finance Director Tim Gage. But he said the state will have “pressures on the spending side.” Among them:

* Last month, a state appellate court ruled that the state illegally collected $300 “smog impact fees” from motorists who registered out-of-state cars in California. More than a million people could be entitled to refunds. The cost could exceed $200 million.

* In a case pending before the Commission on State Mandates, school districts claim the state required them to provide special education programs but failed to fund the mandates. Price tag: $1.5 billion, though that figure is negotiable.

* Also in October, a Sonoma County Superior Court judge concluded that the state has illegally shifted billions of dollars in property tax money from counties to schools. The state will appeal that decision. But the ruling could give local government lobbyists some leverage as they try to wrest more money from Sacramento.

“A couple lawsuits are coming home to roost, so it is a good thing that we’ve got a little extra revenue,” said state Senate Budget Committee Chairman Steve Peace (D-El Cajon).

Although not bearish, Peace was unimpressed with the preliminary figures on tax revenue. The unexpected $500 million is “within the margin of error” of economic forecasts and a small fraction of the overall $80-billion budget, he said, adding that “those numbers can crash as fast as they move up.”

Still, the revenue reflects the health of the economy. And this year, the state’s has been “robust,” the Department of Finance and legislative analyst say in their October reports.

More than half the newfound revenue, $305 million, came from higher-than-expected income tax receipts. Among the reasons for the jump is that California’s unemployment rate--4.9%--is at its lowest level since 1970. Payroll withholding was up 14% in the third quarter over the same period last year.

Additionally, the stock market remains generally healthy, which suggests that high-wage earners will cash in stock options and year-end bonuses. As a result, consumption is up significantly too. A third of the increased revenue flowing to Sacramento is coming from sales taxes.

“This is the year when, it seems, the ‘wealth effect’--all the money people made from the stock market--is taking hold,” economist Williams said.

The Asian economic crisis took a toll in 1998 on exports, which account for a fourth of the state’s economy, and the crisis was expected to continue in 1999. But the Department of Finance reported that exports to Korea, China and Taiwan rose this year for the first time since 1997.

Construction is strong too. The number of jobs in the building industry approached 700,000 this year. That’s more than the previous high of 650,000 workers in 1989.

The number of homes built this year, an estimated 140,000, remains far below the annual average of 225,000 homes built in the 1980s. But there is a significant amount of remodeling of existing homes going on, Williams said. Sales taxes rise as people buy furnishings for their new or remodeled homes.

Overall, sales tax receipts are up 9% this year. One reason for the higher sales taxes is that gasoline prices rose dramatically earlier in the year. But Californians are also buying more cars. Revenue from vehicle license fees is also up 15% over expectations, largely because of new car sales, Williams said.

“We have the strongest increase in taxable sales in a decade,” Williams said. “We haven’t had increases like that since the 1980s.”