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The big question: Will Jerry pull the fiscal trigger?

With autumn leaves comes budget-building time in Sacramento.

In recent years, that’s invariably accompanied by autumnal worries of how awful next year’s whack will be by the many who are touched by the $120 billion spending blueprint.

The big question this go-round is: Will Gov. Jerry Brown pull the trigger?

That’s budget box score for whether up to $2.5 billion in additional spending cuts approved as part of the budget deal signed June 30  – nearly $1.9 billion landing on public schools – will be imposed beginning on the first of next year.

Taking hits of up to $100 million would be universities, community colleges, libraries, in-home caregivers and services to the developmentally disabled.

This on the heels of the current spending plan, which the Democratic governor estimates reduced state spending by more than $15 billion.

These cuts happen if some or all of $4 billion in additional revenue predicted in June doesn’t materialize between now and June 30, 2012.

“What’s going to be the key indicator on the trigger is when we complete a new, full-blown economic forecast and see what that translates into,” said H. D. Palmer, a spokesman for Brown’s Department of Finance.

A cursory look at the state and national economy would suggest the budget’s optimism about the $4 billion is inflated.

At least currently.

California’s unemployment rate is 12.1 percent. Revenue collections so far this fiscal year are running around $600 million below estimates.

Volatile seems an understatement for Wall Street’s schizophrenia. While lurching up sporadically, the Dow Jones has ultimately sunk from 12,414 on June 30 to 10,939 on October 5.
In May, the state Legislative Analyst forecast that the Standard & Poor 500, a broader index of stocks, would be at 1,350 now. It closed October 5 at 1,144.

That fall in value lowers income tax collections, which represent more than 50 percent of the state’s annual revenue, by likely lessening the number of wealthier Californians electing to cash out their capital gains.   

“My estimated tax payment in June would have been higher than the one I just made a couple weeks ago,” said State Controller John Chiang. “The level of the Dow Jones is now materially different than early in the year.”

But Chiang and Brown’s Department of Finance say it’s too early to tell whether the cuts will be imposed.

As Palmer says, any trigger-pulling will be the result of economic forecasts prepared both by the Department of Finance and the Legislative Analyst, beginning later this month and concluding in early December.

An announcement on whether the trigger is to be pulled must be made December 15.

The trigger is structured in two tiers. If revenues are more than $1 billion short of June’s estimates, a first round of $601 million in reductions occur.

Those don’t impact public schools, which have been shorted at least $17 billion over the past several fiscal years, according to a June 2010 survey of nearly 390 districts by the state Department of Education.

One-third of the first round of cuts fall on the University of California and the California State University systems, each shouldering $100 million reductions. Also cut by $100 million each are services to the developmentally disabled and in-home care.

If revenues are predicted to be $2 billion or more short of budget estimates, seven public school days will be eliminated for a savings of $1.5 billion. State support for home-to-school transportation will be cut by nearly $250 million.

“We’ve been advising districts to plan for this and prepare for it,” said Debra Brown, a legislative advocate for the California School Boards Association.

“The concern is what tools will they have to make those reductions if the triggers are pulled? What ability will they have to negotiate the reduced instructional year?”

Community colleges have received similar advice.

“Be prepared for the worst is what we’ve said,” Community College League of California President Scott Lay told Capitol Weekly. “And the worst is $102 million in cuts from tier one and tier two and a per-unit fee increase from $36 to $46.”

Politically, Brown and lawmakers of both parties are not eager to preside over a reduction of seven school days  — particularly when it happens in the current school year that ends in late May or early June 2012.

Despite lawmakers already voting in the last budget to approve the school year reduction, it seems more likely that if it is determined in December school cuts will be required, a special legislative session will be called to seek another, less unpopular budget solution.  

“Shortening the current school year by seven days will be incredibly unpopular with parents either because they want their kids in school or don’t want to pay for more childcare,” said Lay. “That would have a dramatic impact in an election year.”

Palmer, the Legislative Analyst’s Office and others say that even though monthly revenue collections are down during the first quarter of the fiscal year, it has little to do with whether the triggered cuts are imposed.

One reason is the state takes in the bulk of its revenue during the final six months of its fiscal year mainly through estimated tax payments in December and January and income tax and bank and corporations payments in April.

“These monthly totals don’t mean a whole heck of a lot. Tax collection volatility comes from capital gains and monthly revenue totals early in the fiscal year aren’t good at telling you how much of a factor capital gains will be,” said Jason Sisney, a deputy legislative analyst.

“If, hypothetically, the state were to get that $4 billion, it’s quite likely it’s going to be related to capital gains and those won’t really come in until December, January and April.”
A factor that forecast will take into account.

Revenue collections are just one of the many economic ingredients in the forecast.

Among the factors weighed are wages, dividends, auto sales, mortgage rates, housing permits, proprietor’s income, inflation, unemployment and personal income.

But some of those factors aren’t rosy, either.

Outside forecasters, who the Department of Finance asks to review their revenue estimates and economic premises, are guarded about the state of the state’s economy in 2012.
The UCLA Anderson Forecast in September predicts slow overall growth through all of 2012 and almost no growth in employment during the same period.

Unemployment will stay at or near 12 percent through 2011 and average 11 percent through 2013.

Back in January, the Business Forecasting Center at the University of the Pacific said the sluggish economy would lead to a state unemployment rate above 10 percent for three more years.

The California Association of Realtors’ 2012 California Housing Market Forecast issued in September predicts home sales next year to rise 1 percent to 496,200, up from home sales this year of 491,100.    

“Despite the run of unforeseen global events in the first half of this year that slowed the overall economy, 2011 home sales are projected to essentially remain unchanged from last year,” said Beth L. Peerce, president of the realtors association.

“At this point, a strong housing recovery will depend on consumer confidence, job creation and the availability and c
ost of home loans.”

According to the Construction Industry Research Board through August 2011, permits were pulled for 30,128 housing units, up 3 percent when compared to the first eight months of 2010.

Permits for single-family homes were down 16 percent while permits for multifamily units were up 30 percent.

The Sacramento Forecast Project, affiliated with California State University,  Sacramento, – noting that until an uptick in 2010, total permits had declined from a high of 207,400 permits in 2004 to a low of 33,300 in 2009 – said in June the number of permits issued this year will be largely unchanged from 2010 with a 7.3 percent decline in 2012.  

 
“All in all, the state would prefer the stock market to be up rather than down and some of the economic challenges since May and June not to have occurred but it’s an extremely complex picture and I really don’t know where we’ll end up until we’re finished with the forecast,” Sisney said.  


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