Reporting from Sacramento -- California's tax revenue plummeted in July, missing expectations by nearly $539 million and raising fears that deep education cuts will be needed to keep the state budget balanced.
The bad news, announced Tuesday, came less than two months after Gov. Jerry Brown and state lawmakers patched together a budget on the assumption that a budding economic recovery would produce a $4-billion revenue windfall. Those hopes are now fading.
The plunge occurred before the recent Wall Street gyrations that wiped away many of the year's stock-market gains. If the economy remains sluggish and the $4 billion does not materialize, cuts in public schools, universities, libraries, child care, and services for the elderly and frail will automatically take effect.
"Every drop in revenues puts us closer to the drastic trigger cuts that could be imposed next year," state Controller John Chiang said in a statement accompanying his July revenue report.
In Washington on Tuesday, the Federal Reserve sharply downgraded its outlook for the American economy, predicting a "slower pace of recovery" than previously forecast.
California's education cuts will kick in if finance officials determine revenue to be $2 billion or more below expectations as of December. If enacted, the $1.5 billion in school reductions could shrink the academic year by as many as seven days in some districts.
If revenue is $1 billion below expectations, community college fees will rise by $10 per unit, in-home care for disabled and elderly Californians would be reduced further, and state grants for local libraries would be eliminated, among other measures.
"Clearly, the events of the last couple weeks have not been good ones," Mac Taylor, the Legislature's nonpartisan budget examiner, said in an interview. But he urged people not to place too great an emphasis on data from a single month.
"It's still early," Taylor said.
California's financial fortunes are tied more than most states' to the earnings of the wealthy who make their money on stock-market investments. The state's collections from capital gains taxes have swung wildly in the last decade, from $3 billion in 2002 to $11.9 billion in 2007, and dropping to $2.6 billion in 2009.
Such fluctuations have deepened the state's deficits in bad times.
"I think a big argument for that $4-billion [assumption] was the stock market and capital gains," which were strong when the budget was written, said Brad Williams, former chief revenue forecaster for the Legislature. "A lot of that disappeared in the last week or so."
The market could still rebound, as it did somewhat Tuesday, he said, but the economic indicators don't bode well.
"What's disturbing here is the state penciled in $4 billion … which really couldn't be tied back to the underlying economy," Williams said.
H.D. Palmer, a spokesman for Brown's Department of Finance, noted that July is not a critical month for tax collections and that more sales tax receipts have poured into state coffers in recent days. Talk of enacting the trigger cuts is premature, he said.
Assembly Speaker John A. Pérez (D-Los Angeles) said he is waiting to see what happens in coming months but stressed that lawmakers had prepared for the worst.
"That was the beauty of the budget we struck," he said. "We anticipated revenues based on projections, but we had a backup plan."
Los Angeles Times staff writer Michael J. Mishak contributed to this report.