State receives string of dreary economic news

The Associated Press
Thursday May 17, 2001

SACRAMENTO — For two years, California enjoyed a bulging state budget and soaring economy, but no more. 

Not only has the state been pummeled by a continuing and increasingly expensive power crisis, but it has also been stung by bleak economic news for three straight days. All of it has state officials struggling to cope with near-daily forecasts of a grim economic future. 

“We are being hit with these reduced financial estimates just when we are facing a critical need for more resources to get us through the power supply problems this summer,” said Tom Leiser, senior economist for the UCLA Anderson Forecast. “The timing is pretty bad.” 

Legislative Analyst Elizabeth Hill added to the bad news Wednesday, as she predicted the state will face a $4 billion budget shortfall in 2002-03 unless legislators cut more deeply than Gov. Gray Davis proposed in his revised budget Monday. 

Davis reacted to the slowing economy Monday by saying he’ll cut almost $3.2 billion in new programs, tax cuts and spending increases he proposed in January. The planned $102.9 billion state budget also cuts the state’s reserves to $1 billion, down from the $6 billion in reserves included in the 2000-01 budget. 

In doing so, Davis blamed the slowing economy, not the crushing power crisis. No longer does California benefit from high revenues from taxes on stock options and capital gains. 

The power crisis, however, will have a greater influence on future budgets, forecasters said, when the increased electricity rates passed by the state Public Utilities Commission Tuesday reach customers. 

Hill said Davis’ revised budget doesn’t put the state in position to reach a balanced budget in a future that includes a slowing economy. Instead, she said, it makes too many one-time cuts and the chief analyst for the Legislature urged lawmakers to go deeper than Davis as they draft a final budget plan. 

“It will be much more difficult to correct a $4 billion problem (in fiscal year 2002-03) if they don’t start today,” Hill said. 

The Assembly and Senate still must approve a final budget for the next fiscal year, which begins July 1. 

They’ll do so under the eyes of the financial world, which has reacted against the state’s economic condition in recent weeks. More evidence of that came Tuesday when Moody’s Investors Service downgraded California’s credit and cited the energy crisis’ stubborn drain on the state’s finances. In April, Standard & Poors also downgraded California’s credit, putting it near the bottom of all 50 states. 

Part of Wall Street’s concern comes from the state’s inability to approve the sale of $13.4 billion in revenue bonds to repay the state for the billions of dollars it’s spent to buy power for three troubled investor-owned utilities. 

Those bonds may not be sold until August, traditionally a slow time for bond sales nationwide, and also a time in which the state may find itself in a cash crunch. 

Davis’ budget assumes the state will be repaid by mid-August for at least $6.7 billion in power buys. Davis signed a bill last week authorizing the sale of revenue bonds to repay the general fund for the power buys. 

However, no one outside of the Davis administration knows how much the state is paying for power, and if the prices go too high, California could run out of money before the bond revenues can replenish the treasury. 

The lack of that money, combined with the effects of higher electricity rates could create a larger problem for state finances, analysts said. 

Despite the string of bleak economic announcements, California still is in far better financial shape than it was during the recession of the early 1990s when then-Gov. Pete Wilson was scraping to make up for a $14 billion budget shortfall. 

Sandy Harrison, spokesman for the state Department of Finance, said this year’s budget also suffers in comparison to those of the two previous years. “We’ve simply seen the end of a boom that was created by a soaring stock market.” 

Hill’s $4 billion shortfall estimate is “very high,” Harrison said, adding that Davis made one-time cuts because he made one-time budget additions when times were good. 

If the economy continues to struggle, Davis believes there could be a shortfall, Harrison said. 

Either way, Davis faces an increasingly aggressive cadre of Republican legislators who said Wednesday he fobbed off all the tough budget choices to legislators. 

Davis, said Assemblyman George Runner, the Lancaster Republican walking point for the GOP budget efforts in the Assembly, has “abdicated his responsibility to produce a responsible budget.” 


On the Net: Find a copy of the governor’s budget revise at www.dof.ca.gov