State Revenue $1 Billion Short in 1st Quarter

Just three months into the new fiscal year--and even before the full effects of the Sept. 11 attacks have begun to be felt--state government revenues are running nearly $1 billion below expectations, sobering evidence of the state’s deepening financial troubles.

Revenue from two major categories--personal income taxes and bank and corporate taxes--appear to be down $567 million in September from estimates used to craft California’s 2001-02 budget, bringing the state’s revenue shortfall since May to about $970 million, according to a memo distributed by the state’s legislative analyst’s office to members of the Legislature.

If the trend continues, California could easily burn through a $2.6-billion budget reserve, paving the way for a multibillion-dollar deficit that could trigger deep spending cuts.

“We’re in for very difficult times,” said Senate Leader John Burton (D-San Francisco). “I think we may eat up the surplus.”

“We knew revenue was going to be down,” added Assemblyman Tony Cardenas, the Sylmar Democrat who heads the Assembly Budget Committee. “But this is certainly beyond our expectation. . . . We’re looking at cuts if it continues at this rate.”

Republicans would like Gov. Gray Davis to curtail state spending immediately. Davis is considering hundreds of bills--some of which cost money. Senate Republican Leader Jim Brulte of Rancho Cucamonga said Davis should consider the state’s fiscal outlook as he reviews each measure.

“Every dollar that is added to a general fund program is a dollar that builds the base of that program in future years,” he said.

Further complicating California’s budget outlook is the question of when--if ever--bonds will be sold to repay the more than $6 billion borrowed from the state general fund to cover energy costs.

The legislative analyst’s office based its memo on incomplete information provided by state tax officials. It shows personal income receipts down by $411 million for September, while bank and corporate receipts are running $156 million below predictions. Yet to be tallied are sales tax revenue. If it comes in below estimates, the deficit could grow.

The current shortfall, said Brad Williams, senior economist for the legislative analyst’s office, is largely related to economic trouble that predates the Sept. 11 terrorist attacks.

“It appears as though the drop in the stock market and slowdown in economic activity that had occurred even before the Sept. 11 attack is depressing revenues related to profits, capital gains, stock options and wages,” the memo states.

Fueling the California decline in personal income taxes in September are so-called quarterly estimated payments made by individual taxpayers for income they earn, for example, from stocks. The payments were $270 million below estimates and 16% below year-ago levels.

“They were very, very soft,” Williams said. “It’s a sign that the drop-off in the stock market is having a pronounced effect on capital gains payments to the state.”

Sandy Harrison, a spokesman for the state’s Department of Finance, said that if the current trends continue, officials would be forced to make adjustments in the 2002-03 budget.

“It will mean when we make program decisions, there will be more things we can’t afford to do,” he said.

Burton speculated that the governor may enact a hiring freeze of state workers.

“There’s going to be a hard look at everything,” Burton said. “I would hate to own property around UC Merced,” he added, in a reference to the proposed San Joaquin Valley campus.

*

Times staff writer Virginia Ellis contributed to this report.