Economic Slide Worries State Budget Planners

Even without the energy crisis, the slumping state and national economies could force deep cuts in the budget proposed by Gov. Gray Davis, the state Senate’s lead budget writer said Thursday.

Citing a drop of $300 million in sales and income tax receipts last month, Senate Budget Committee Chairman Steve Peace (D-Chula Vista) said his bearish attitude is unrelated to the state’s massive power purchases for cash-strapped utilities, currently costing $45 million a day.

Rather, he and the state’s top economists are most concerned about the declining stock market.

A Davis spokeswoman said the governor is confident that there will be sufficient money for his spending proposals, ranging from an expansion of the junior high school year to a back-to-school sales tax holiday in August. Indeed, after a strong January, state tax receipts are $587 million above forecasts for the first two months of 2001.

But Peace is focusing on the February dip in receipts, saying it may signal a downward trend in salary and wages. That would limit income tax payments, which account for about 40% of state revenue.

“At best,” Peace said in an interview, “there is going to be no more money” beyond what Davis forecast when he released his $104.7-billion budget proposal in January.

Because 2000 was a strong year, Peace said, Sacramento may end up with sufficient money for 2001 after the April tax payments are made. But workers who have come to rely on stock options and dividends will probably see far smaller gains, and probably losses, in 2001. That suggests that the budget in 2002 will be tight, and Peace said the state should maintain a large reserve so it can weather a downturn then.

Peace pointed to a $169-million drop in sales tax receipts in February, saying it was probably a reflection of lower-than-expected Christmas sales. A $129-million fall in state income tax receipts last month suggests that higher-paid workers’ wallets are getting thinner as stock markets sputter.

Final budget decisions are not made until after most Californians pay state income taxes in April. Davis must sign the spending plan by the July 1 start of the new fiscal year.

The Senate Budget Committee, which has begun work on the plan for the 2001-02 fiscal year, already has stripped $1.9 billion from Davis’ proposals, taking bites from planned construction projects and other onetime spending items. On Thursday, Peace told other lawmakers that the Legislature may need to pare more.

In December, Ted Gibson, the state Department of Finance’s chief economist, offered a bullish view of California’s economy. But Thursday, he voiced concern about the falling stock market and other indicators that the economy is slowing.

“It is safe to predict that we’re not going to have more money,” Gibson said. “I’m not ready personally to . . . say ‘recession.’ . . . But clearly the events of recent weeks are going to be weighing heavily in our May forecast.”

Brad Williams, economist for the nonpartisan legislative analyst’s office, cited an analysis earlier this week by Data Resources, a subsidiary of Standard & Poor’s, that lowered its estimate of economic growth, and he suggested that there is a 50% chance of a recession. Earlier, the economic forecaster had predicted economic growth for the year.

“Clearly, as we move into this year, things are slowing down,” Williams said. “The overriding concern is the national slowdown in high tech and how that affects us. There is plenty of reason to be concerned about that.”