In California Budget, Some See A Year Of Magical Thinking
SACRAMENTO (CBS / AP) — During his State of the State address in January, Gov. Jerry Brown acknowledged California’s deep financial hole but also expressed faith in the state’s ability to rebound and surprise its doubters.
The growth in California’s economy during the three decades since he first held the governor’s office, he said, could be described as “a marvel, even a miracle and some kind of gift.”
The budget he signed Thursday for the new fiscal year extends that abiding faith into the year ahead.
Brown and his fellow Democrats in the Legislature balanced the budget largely on the hope of a small miracle — that California’s general fund will collect about $12 billion more in tax revenue than was anticipated in January. If not, it will mean more spending cuts, including the possibility of shortening the school year by seven days.
The biggest question mark hanging over the budget plan is whether that revenue gift will appear.
Many economists are skeptical. California is struggling to pull itself out of recession, and one recent forecast suggests the housing bust will remain a drag on the state’s economy for years, contributing to an unemployment rate that will persist above 10 percent until mid-2013.
The Brown administration says there is evidence to support the sunny revenue projections that include an estimated $4 billion in higher tax receipts on top of more than $6 billion Brown assumed in his May budget revision. Several billion dollars more than anticipated already has been deposited in the state’s accounts.
Department of Finance officials say the main reason is that the wealthiest Californians are seeing their incomes grow faster than the average worker.
The state’s income tax takes a bigger bite of their earnings, which makes tax revenue susceptible to wide swings during relatively small changes in the economy. That volatility — which sent tax revenue crashing a few years ago — now is bringing in more cash than the state expected even six months ago.
But some economists say the rapid revenue growth so far this year cannot be sustained while the state remains stuck in a sluggish recovery.
“It’s certainly not based on any change in the economic outlook,” said Jerry Nickelsburg, senior economist with the University of California, Los Angeles Anderson Forecast.
The June edition of the Anderson forecast projected employment growth of 1.7 percent in 2011 and 2.4 percent in 2012. That would be better than the nation as a whole, but still leaves the state in a hole after a much larger initial decline.
The sluggish housing rebound and a demographic shift toward apartment and condominium living, which will depress home sales and construction, is likely to delay economic recovery in inland California for many years, the report said.
California’s unemployment rate has been edging down in recent months, but economists believe that is at least partly because so many people have stopped looking for work and are no longer counted in the official statistics. The state still has the second highest unemployment rate in the nation at 11.7 percent, behind Nevada. An estimated 2.1 million Californians are out of work.
Jeff Michael, director of the Business Forecasting Center at University of the Pacific in Stockton, said the projections in the state budget Brown signed this week seem optimistic but noted the governor and Democratic lawmakers built in spending cuts that would take place immediately if the estimates fall short.
Those cuts will hit public schools, universities and social service programs if the money fails to materialize by the middle of the fiscal year.
Republican lawmakers derided the revenue forecast, one of the cornerstones of the Democratic budget. Senate Minority Leader Bob Dutton equated it to wishful thinking, while the leading Republican on the Senate Budget Committee compared it to magic.
“That’s a wand that Harry Potter would be proud to wield,” said Sen. Bob Huff, R-Diamond Bar.
An editorial cartoon in The Sacramento Bee showed the governor’s dog — a Welch corgi named Sutter — digging up a bag of cash on the Capitol grounds.
Democrats say their budget is sound, especially because it will be balanced with detailed cuts if the revenue estimates don’t pan out.
“You can’t say that the numbers are not real, the $4 billion is not real, and at the same time say the trigger cuts are not,” Assemblyman Bob Blumenfield, D-Sherman Oaks, said during the debate on the budget this week. “I think the numbers are real, and I hope and I pray that we don’t have these trigger cuts.”
What little economic recovery has arrived in California has landed unevenly.
Nine of the 10 highest metropolitan-area unemployment rates in the U.S. in May were in California. The jobless rate ranged from 15 percent in Bakersfield to 27.7 percent in El Centro, just north of the border with Mexico and about 110 miles east of San Diego.
Yet more than a half-dozen metro areas near California’s Pacific coast have jobless rates in the single digits, including San Diego, San Francisco and San Jose. Three metro areas posted rates even lower than the U.S. unemployment rate of 9.1 percent.
Those bright spots in areas rich with high-earning households are helping the state’s general fund, which spent $103 billion in 2007 but would fall to just $86 billion in the fiscal year that starts Friday.
For May and June alone, California has received about $1.2 billion in tax revenue that wasn’t counted in Brown’s May budget revision, mostly from personal income tax. That May proposal already included $2.8 billion more than had been expected when the governor released his first budget plan in January.
The state Department of Finance says the increased tax collections appear to be largely because incomes are rising faster for high earners. The state’s income tax is applied using a progressive rate structure, with higher rates charged on people who earn more.
In 2009, the most recent data available, almost 37 percent of all personal income tax collected came from the top 1 percent of earners in the state. Nearly 59 percent of the revenue came from the top 5 percent.
The bottom 60 percent — 8.6 million of California’s 14.4 million personal income tax filers — accounted for less than 4 percent of income tax revenue.
“A change in that small slice of (high-earning) taxpayers can have a disproportionate effect on revenue,” said H.D. Palmer, spokesman for the Department of Finance.
The effect of the progressive income tax and California’s entrepreneurial tendencies are well-known to economists: Tax revenue rises rapidly during economic upswings but plunges during slumps.
Some surprise tax revenue is typical when the economy starts to rebound.
“The question is whether that’s the continuing trend,” said Michael, of the University of Pacific.
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