State budget: The deficit that never seems to end

Gov. Arnold Schwarzenegger met with legislative leaders Wednesday to try to find ways to fill an immediate hole in this year’s budget that could be as large as $5 billion, according to estimates from Senate Leader Don Perata, D-Oakland. Perata said the deficit could swell to $15 billion or more by the middle of next year.

The bleak outlook comes amid a weakening state economy and an unprecedented meltdown on Wall Street, which has pinched corporate and municipal credit.

State government employees suffered thousands of layoffs and faced pay cuts in the budget that was signed in September, and they could fare even worse in the 2009-10 budget. Also, the state unemployment fund that pays benefits to the jobless is dispensing about $25 million a day as the unemployment rate reaches 7.7 percent – the highest in more than a decade.  

“The options are all bad,” Perata said Tuesday. “I am not very optimistic we will get a tax increase,” which means there could be more cuts to state health services and education, he added.

The talk is also sure to revive some “revenue acceleration” options that were rejected by Democrats in the round of budget talks that wrapped up less than three weeks ago. But legislative sources in both parties said discussion of accelerating collection on individual taxpayers’ withholding payments would not be on the table.

The shortfall in state budget revenues stems from the weakening economy, both in the state and nationally, in the wake of a persistent housing slump and general economic slowdown. The gap is also attributable to overly optimistic revenue projections made by state budget makers.

And Perata said the outlook for next year is even worse.

“I think we’re heading into another year of $15 billion to $18 billion deficits,” he said, looking ahead to the 2009-10 budget year, which begins next July 1.

While the state wrestles with lower than expected income into state coffers, it is also being hit by the Wall Street credit crunch.
Last week, Gov. Schwarzenegger sent a letter to Treasury Secretary Henry Paulson warning the state may need assistance securing  $7 billion in short-term loans to cover operating expenses.

State treasurer Bill Lockyer said the state could run out of money by the end of month if it does not secure some form of short-term loan. Schwarzenegger spokesman Aaron McLear said these types of short-term loans are commonplace, and that the state routinely relies on bridge loans to overcome the uneven cycle of state payments and income flow.

“These types of revenue anticipation loans are very common,” he said. “But we may not be able to secure it through Wall Street,” because of the virtual credit freeze, he said.  

Sen. Dean Florez, D-Shafter, sent a letter to Lockyer this week, suggesting the state look beyond the federal government for help with the short-term cash crisis. “The state should look to one of the world’s largest investors, the California Public Employee Retirement System, as a reasonable purchaser of short-term California state debt,” he wrote.

That idea was rejected by Perata, who said he does not support effectively borrowing against state employee pensions. “I wouldn’t want to do that,” said Perata. “Public employees right now are feeling a lot of pain.”

The reconvening of the Big 5 to wrestle with budget issues comes just weeks after Republican Gov. Arnold Schwarzenegger and legislative leaders finally agreed to a 2008-09 budget, the most overdue spending plan in the state’s history.

Now, the governor and the four leaders of the Legislature – Senate Leader Don Perata and Assembly Speaker Karen Bass, both Democrats; and Senate GOP Leader Dave Cogdill and Assembly Republican Leader Mike Villines – are poised to meet Wednesday afternoon to talk options.

Representatives from the Department of Finance and the State Treasurer’s office will also be at the 2 p.m. meeting Wednesday.

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