Posted on 08/22/2007 7:42:20 PM PDT by NormsRevenge
Even before Gov. Arnold Schwarzenegger signs the state's overdue budget, turmoil in the housing and credit markets is cutting into state tax revenue and threatening to make next year's budget battle even worse.
Economists say a continuing slump in new-home sales and construction, layoffs and bankruptcies in the mortgage-lending industry, and an increasingly volatile stock market have begun erasing revenue that lawmakers assumed would materialize to cover the $145 billion budget.
With another $5 billion deficit looming for the state next summer, falling revenue only will make it harder for lawmakers to close the gap without considering painful cuts to schools, transportation projects and an array of social services.
"It's probable that the budget we passed will not be balanced at all by the end of the year because there will have been less revenues than anticipated," said Stephen Levy, senior economist at the Center for Continuing Study of the California Economy in Palo Alto.
"That's been the case many years in California, but next year it could be a real crunch. This could easily push (the deficit) up to $7 billion, and that's without more problems in the stock market," Levy said.
In many ways, the state's new budget is besieged by what economists view as the delayed effect of the depressed housing market on California's economy.
"We've been sounding the alarm on this for quite some time. The surprise has been that it's taken this long to develop," said Ryan Ratcliff, an economist with the University of California, Los Angeles Anderson Forecast who studies the California economy. "We've really just started to see the real estate weakness take a bite out of job growth ... and that's going to take a bite out of tax revenue."
Despite more than two years of warnings about a housing bubble and more than a year of sluggish home sales across the state, California's coffers had until recently seen few ill effects of the housing downturn.
As recently as May, Gov. Arnold Schwarzenegger's finance team revised state job growth figures upward, saying there was little evidence that housing- and lending-related problems would spread to other parts of the economy. It also said the rest of the state would absorb any losses in the housing sector.
California's economic growth, state economists concluded, would steadily begin improving in July. But that forecast now seems overly optimistic.
In June, state job growth flattened as gains in government and education barely kept pace with 11,000 layoffs in construction and financial markets, the state's worst showing in those two areas since 1995.
In July, California lost 8,600 nonfarm jobs while unemployment edged up as problems in the housing market began to ripple through related markets. Building material and garden equipment employers such as Home Depot shed 800 jobs in a rare midsummer loss.
Such job losses will translate into a drop in personal income tax revenue for the state, but California's budget problems just begin there.
Since the state's May revenue projections - which formed the backbone of the spending plan lawmakers approved on Tuesday - California's cash flow has come up $1.1 billion short.
With increasing stock market fears of a mortgage-related credit meltdown, California's heavy reliance on stock option and capital gains tax revenue also could come into play.
The tax revenue California collects from its richest few residents swings wildly, by billions of dollars each year, depending on gains and losses on Wall Street.
"The volatility of the last month has been enough to wipe out a lot of capital gains," Ratcliff said. "I think we have a nasty surprise waiting for us on that at the end in 2007."
Ed Leamer, Anderson's senior economist, has classified the U.S. and California economies as "close" to recessionary conditions. He said the state's budget can only get worse than what officials predicted.
"Our thinking is that this turmoil in the housing and credit markets is generally going to extend the problems in housing, and there will be no meaningful return to normalcy in 2008," he said.
Leamer, Levy and others said the real danger, however, is that the shaky housing market undercuts consumer confidence and retail spending, which drives two-thirds of the economy.
"What's changed since May is that the slowdown has expanded," Levy said.
In California, where many people have tied their wealth to home equity, "It's important if that impacts how people feel about their housing investments," he said.
Nationwide, more than 50 lenders have gone bankrupt this year, including two of the nation's 10 largest, while 38,000 financial services employees have lost their jobs.
H.D. Palmer, spokesman for Schwarzenegger's finance department, said the administration is taking a glass half-full view of the economy and its potential effect on state finances.
"If there is good news, it's that we've built the effect of the housing market into our budget," Palmer said. "The fact that we're seeing this continued slump is why the governor thought it was prudent to hedge against slower economic growth with a big budget reserve."
The budget approved Tuesday - after a 51-day standoff led by Senate Republicans - carries a reserve of $3.4 billion. Schwarzenegger also has promised to use his veto power to slice an additional $700 million out of the $145 billion plan.
But it will be hard for lawmakers to rationalize spending all of that reserve to cover next year's projected shortfall because additional multibillion-dollar deficits are forecast through 2011.
"We are going to have a real serious problem next year that will dwarf this year if we don't figure out how to address it," said Senate President Pro Tem Don Perata, D-Oakland.
On Wednesday, Perata called for creating a budget-reform panel made up of Schwarzenegger, the four legislative leaders and the state's nonpartisan legislative analyst. He said the group must rethink the state's reliance on volatile revenue sources and formula-driven spending that limits California's financial flexibility.
"When we have a bad national economy as we are having right now, we have less money because we depend so much on big personal income tax and stock market numbers. As a consequence, next year will be a dark shadow," Perata said.
Schwarzenegger endorsed the idea and said in a letter to Perata that the panel should begin meeting immediately.
Arnold the fool strikes again.
Deficits as far as the eye can see,, and Perata has the nerve to criticize the ‘right wing’ senators who held out for some sanity in the latest budget debacle.
hmmm, I drove through Van Nuys Ca this afternoon, and a couple of days prior to that too. Construction equipment parked in the middle of the street, traffic is rerouted, but something really weird. NO ONE IS WORKING ON THE JOB.
This looks like a third world country. NO money to do the work so the equipment is just being stored on the street.
California should just confiscate $1m each from 1,000 liberal Hollywood Democrats. Those idiots love taxes and socialism and all that - - I’m sure they wouldn’t mind coughing up the loot. They’re not hypocrites, are they? That would be a cool billion for California. Might help.
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus
This is the Democrat leader, right? "Address it"?? Oh..... he means tax hikes.
On Wednesday, Perata called for creating a budget-reform panel made up of Schwarzenegger, the four legislative leaders and the state's nonpartisan legislative analyst. He said the group must rethink the state's reliance on volatile revenue sources and formula-driven spending that limits California's financial flexibility.
....Tax hikes on the middle class.
"When we have a bad national economy as we are having right now, we have less money because we depend so much on big personal income tax and stock market numbers. As a consequence, next year will be a dark shadow," Perata said.
Okay, Perata the Democrat is lying. Surprise, surprise....
Schwarzenegger endorsed the idea and said in a letter to Perata that the panel should begin meeting immediately.
Sounds like lame duck Arnold is finally ready to help the Democrats raise taxes.
Surprise, surprise....
Cal-ee-forn-ee-a slowly killing the goose laying the golden eggs. I don’t live there but love the state, geography, weather etc... Democraps, Perverts and Hollyweird have scarred Ca. Now it’s just way too expensive to live there. Housing costs way too much although wish I bought a few homes there in the 70’s.
That's the ticket!
The only hangup is that you cannot finance taxes under most contracts (leases being the exception, but that's because it's not a purchase). Once you create a mechanism to allow that, you make it possible to have a sales tax only system.
In the meantime, it should great fun to watch as all the homeowners in affected areas go file re-assessment affadavits to have their values moved down.
And then watch the screaming in the legislature as they realize revenues are gonna go down 10% next year.
BFD! They fought over less than 1%.
Pardon me, but aren't these the same jack asses who have refused to deal with this obvious and long predicted situation for the last many years?
The dems will want to expand tax revenue and it will have to come from the middle class, people with a paying job, regardless of where they say it's coming from. The minority will want to cut entitlements and other spending programs. The governor will side with the dems because he doesn't want to be portrayed as a bad guy taking bread and medicine away from the elderly and the children.
Helluva’n arrangement, huh?
I sure wish the DOJ would get the local feds to call a grand jury and get the PeRATa perp walk dance going soon, it’s almost 3 years and counting since it began an FBI investigation of Perata and famly and their cozy little influence peddling ring.. shades of Harry Reid.
You've got to like some editors, "Teflon Don Employs Jacko's Dick."
LOL.. Thanks!
Too bad we didn’t have a DoJ that was as eager to prosecute democRat corruption as it is to do a lot of tap dancing and avoid rocking the boat.
It really leaves a bad taste for gubamint for a lot of folks out here seeing how the feds are effectively doing little to go after dirty dems while republicans are fair game.
Terrorists come in mnay forms and fashions, yaknow... domestic politicos with leftist agendas seem like a good place to start, imo.
The California electorate had their chance to restore sanity to state spending when they voted on Proposition 76, the “live within your means” act. The voters said “no, we don’t want to live within our means.” It is that simple. California voters want a free ride and they are about to find out, AGAIN, there is no free ride.
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus
I supported and still would support Prop 76. Yes, many conservatives voted it down because it didn’t go far enough to clean house. Just like many conservatives vote 3rd party because the Republican doesn’t go far enough and let the liberal Democrat win.
I will say this much. Conservatives voted against Prop 76 and now we see how well the status quo is working. California is screwed and there is no attempt to stop spending on the horizon. And you would have me believe that Prop 76 was a worse situation than what we have now.
I’m not buying any.
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