Calif. Faces Up to $10 Billion 2006-07 Shortfall (LAO report estimate)

SAN FRANCISCO (Reuters) - California's state government faces a year-end shortfall of $6.7 billion in its 2005-06 year, a gap it can close with $3.5 billion in deficit-financing bonds and with improving revenues, the state legislative analyst's office said on Wednesday.

However, the nonpartisan office, which tracks the state's revenues, spending and budget, said California's budget gap could grow to nearly $10 billion in the state's 2006-07 year because a number of one-time solutions used to balance the current 2004-05 year budget will not be available.

In the next year, California's legislative analyst's office said in a report, it estimates state revenue will climb to $82.2 billion and expenditures will total $89.5 billion, resulting in a $7.3 billion operating shortfall.

After taking into account $614 million from a reserve from this year that can be carried over, California's 2005-06 year-end deficit would be $6.7 billion, the office said.

It said it sees California's budget gap growing to nearly $10 billion in 2006-07 because the one-time moves by Gov. Arnold Schwarzenegger (news - web sites) to balance this year's budget will expire, exposing the state's persistent structural budget deficit.

Because of that gap, which emerged as revenues plunged amid a recession and the stock market's steep decline, California has the lowest credit rating of any U.S. state.

The legislative analyst's office noted that "absent corrective actions, the state will not resolve its structural imbalance."

November 2004 - California's Fiscal Outlook

Chapter 1

The Budget Outlook

Summary

Major Budget Challenges Loom

In approaching the 2005-06 budget, California's policymakers face a deceptively difficult challenge. On the one hand, the strengthening revenue picture, coupled with the availability of the remaining $3.5 billion in authorized deficit-financing bonds that have not yet been used, would enable the Legislature to balance the 2005-06 budget by making a relatively modest amount of hard choices to reduce spending and/or augment revenues.

This would only be a temporary fix, however, as the 2005-06 outlook masks a much more negative underlying budget picture. This is because the 2005-06 budget will be helped by a carry-over balance and various limited-term solutions enacted in the 2004-05 budget which will not be available in subsequent years. As a result, these solutions cannot be counted on to address the state's large and persistent ongoing structural budget shortfall. We project that this shortfall will reach nearly $10 billion in 2006-07 under current-law spending and revenue policies, absent corrective actions.

The size and persistence of this shortfall, even in the face of an expanding economy and strengthening revenues, underscores a critical point that we have made in the past—namely, it is unlikely that California will be able to simply "grow its way out" of this shortfall.

Basis for Our Estimates

Our revenue and expenditure forecasts are based primarily on the requirements of current law, including constitutional and statutory funding requirements. Our estimates also reflect projected changes in caseloads, federal reimbursements, and other factors affecting program costs. Of special significance in the current forecast are our assumptions in the following three areas.

Governor's Higher Education Compact. In the current forecast, we have not assumed the Governor's "compact" with higher education, as the Legislature has taken no statutory action to implement such an agreement. Rather, our estimates for higher education are based on projected enrollment and inflation-related increases. Fully funding the compact would require added annual expenditures beyond those we are projecting, reaching over $500 million by the final year of our forecast period.

Future Proposition 58 Transfers to the Budget Stabilization Account. Proposition 58, approved by the voters in March 2004, created a Budget Stabilization Account (BSA) to cushion the state against budget-related shortfalls. The measure provided for annual transfers of General Fund revenues to the BSA, equaling 1 percent of General Fund revenues in 2006-07 (about $875 million), 2 percent in 2007-08 (about $1.9 billion), and 3 percent in 2008-09 (about $2.9 billion) and thereafter until the balance in the fund reaches $8 billion. The measure, however, allows the transfers to be suspended or reduced through a Governor's executive order. Given the major budget shortfalls we are already projecting in the out years, we have not included the added expenditures that would be needed to fund the annual transfers to the BSA in our estimates.

Interaction of Proposition 98 With Revenue Increases. Our baseline estimates include the impacts of the current-year increase in revenues—and other factors—on the Proposition 98 spending levels. This is consistent with language in Chapter 213, which was enacted with this year's budget. However, given the increased General Fund shortfalls and increased pressures on non-Proposition 98 programs that would result from this use of revenues, we also show the outlook assuming no change in 2004-05 Proposition 98 appropriations.

Projections, Not Predictions

Our estimates are not predictions of what the Legislature and Governor will adopt as policies and funding levels in future budgets. Rather, our estimates are intended to be a reasonable "baseline" projection of what would happen if current-law policies were allowed to operate in the future. In this regard, we believe that our forecast provides a meaningful starting point for legislative deliberations involving the state's budget.

I don't think any stinking liberal in the state of California has any room to talk about the solution to their problems -- since I have been a Californian for over 55 years...these piles of excrement are the very people that put the state where it is...and at least we now have Arnie trying to work towards a solution. What this man picked up was no light load... a very massive debt created by criminal liberalism of the left, our great criminal Grey Davis....who dealt the greatest negative blow to the state that was once the leader in this nation, in terms of education, economic stability, and demographics.

The liberal left has no longer any right to any position in this state even though the brain-dead yellow dog dems here keep voting in the very people that have destroyed the integrity of this state -- total stupidiy.

Let us not hear from another liberal leftist when it comes to what is right for California.

True Lies - The Sequel

Never again will government be allowed to spend money it doesn’t have.
Never again will the state be allowed to borrow money to pay for its operating expenses."
State of the State address by Gov. Arnold Schwarzenegger, Jan. 6, 2004:

Schwarzenegger Calls For Cuts, Cuts, Cuts
May 4, 2004

In what may be a preview of his proposed budget revision that is due out next week, Schwarzenegger also told business leaders that he intended to "cut, cut, cut" state spending.
"We will make sure that we are healthy as a state," he said. "And that our public sector spending does not grow out of control. But that is what some of those legislators want -- for it to grow and grow. That will not happen under this leadership. We will make the cuts, we will not increase taxes, that is for sure."

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