State faces 18-month budget shortfall of $25.4 billion

When it  comes to the state budget, we’ve got some bad news and some worse news.

First the bad news. California faces a far-larger budget shortfall than state officials were projecting only weeks ago. The deficit over the next year and half has soared to $25.4 billion. That’s according to a new report from the state’s legislative analyst Mac Taylor, who unveiled his first look at the state’s budget problem.

Taylor, the Legislature’s nonpartisan fiscal adviser, projects structural deficits of more than $20 billion annually into the foreseeable future unless state lawmakers act to make systemic changes to state spending or revenues. Those could involve cuts, new taxes and borrowing — and all three have run into political opposition in the past in the Legislature. 

Taylor said there was no quick fix to California’s systemic and recession-driven budget woes.

“It’s going to take a long time,” Taylor said of the prospects of solving the state’s budget problem. “The problem is simply too large.”

The daunting numbers could be even worse if the stock portfolios of the state’s pension systems cannot meet earlier expectations. Because the state has a defined-benefit plan, the general fund would have to supplement any shortfalls if the state pension funds fail to meet their targets for the year.

The grim budget outlook  is sure to dominate the beginning of Gov.-elect  Jerry Brown’s first term in office and beyond, if permanent spending reductions or revenue increases are not enacted.

Brown has already met with finance officials in Sacramento and has vowed to make the budget his top priority as governor. Brown is vacationing this week in Arizona, but his spokesman, Evan Westrup, said members of his transition team were aware of the LAO’s report and were reviewing it. Brown’s office offered no further comments on the preliminary analysis, but Brown himself said the problem was “daunting” in a Capitol press conference last week.

The startling figure means the state faces an even tougher budget challenge than it did leading up to the passage of the current spending plan, which was historically late, as lawmakers wrangled over how to close the gap for 100 days into the new fiscal year. The projected deficit is the equivalent of almost 30 percent of this year’s general fund budget.

But here’s the worse news: That $25.4 billion deficit already assumes billions of dollars in cuts to public education. A series of temporary tax increases passed in 2009 are set to expire next year. When they do, it will lower the state’s minimum funding level for schools set by Proposition 98. Taylor said if schools are funded at the bare minimum level required by Proposition 98, it would mean roughly a $2 billion reduction in school spending from the current budget-year levels.

In addition, temporary federal aid to schools is set to expire. Taylor said the overall hit to schools could be $4-$5 billion, and that’s with a $25.4 billion deficit.

The state’s current budget is about $6 billion out of whack, according to estimates from the analyst’s office. The state appears likely to receive about $3.5 billion less in federal aid than state budget writers hoped for in this year’s spending plan. In addition, plans to save about $1 billion in prison costs seem unrealistic.

Adding to the problem are measures passed by California voters last week , which will cost the state up to $1 billion per year. That is according to an economic forecast conducted by the nonpartisan state legislative analyst’s office.

Last week, voters approved Proposition 22, which limits the state’s ability to borrow money from local governments. They also approved Proposition 26, which makes it harder to raise fees and rolls back fees that were passed by less than a two-thirds vote this year.

When fully phased in, these two measures will cost the state about $1 billion annually, the report states.

“The ongoing effect of Propositions 22 and 26 — approaching $1 billion or more annually — does not hit the General Fund until 2012–13 in our forecast,” the report states.

The analyst’s report predicts a $6-billion deficit in the current budget year and “a $19-billion gap between projected revenues and spending in 2011–12.”

The LAO report did not offer specific spending cuts or revenue increases, but Taylor did have some general advice for lawmakers Wednesday. “We think that they should start soon, act early,” he said.

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