The anatomy of a budget shortfall

May 15, 2010

By Daniel Weintraub

As the governor’s revised budget makes all too clear, California is in a world of hurt. The deepest recession since the Great Depression has reduced personal incomes, retail sales, corporate profits and property values. Those are the things the state and local governments tax to provide the revenue to support the schools, universities, health and social services and law enforcement on which most of us depend in one way or another.

Still, despite an alarming drop in tax receipts below expectations in April, Gov. Arnold Schwarzenegger is forecasting an increase of about $3 billion in revenues between the budget year that ends June 30 and the next fiscal year. That would be a boost from about $86.5 billion to $89.3 billion, or about 3.2 percent.

So if revenues are growing, why is there such a huge budget shortfall. A couple of reasons.

First, that entire projected growth and more will be wiped out before the year even begins by the need to repay the deficit in this year’s budget. If no changes are made before the end of the fiscal year, the state expects to spend $6.2 billion more this year than it is taking in. That red ink must be sopped up as part of next year’s spending plan.

That means the state will actually have less to spend next year on programs than it is spending this year. Under this scenario the state would have $83.1 billion left after paying off the deficit. That’s about 4.8 percent less than the $87.3 billion that the state is spending this year.

It gets worse. Current laws and the increasing demand for services will drive costs up automatically unless the Legislature and the governor take action to reduce services or change eligibility rules for various programs.

If nothing is done, general fund spending will climb from $87.3 billion this year to $99.5 billion next year, according to Department of Finance projections. This is why the budget shortfall is often described as an $18 billion problem.

Break it down this way: the government ends the year $6.2 billion in the red and projects spending next year to grow at a rate that would exceed revenues by about $10 billion. Throw in the cost of rebuilding a tiny reserve for emergencies and you get to the $18 billion figure.

That’s more than 20 percent of the size of the general fund for a year. It is more than the state spends on prisons and its four-year universities combined. It’s more than the entire Med-Cal budget and half what the general fund dedicates to K-14 education.

And that $18 billion number comes after including temporary tax increases that will soon go off the books and federal funds that were part of the economic stimulus bill and are scheduled to expire beginning next year. So even if the state somehow managed to erase the shortfall this year, the books would not remain balanced for long.

California is not going to eliminate its welfare program, as Gov. Schwarzenegger has proposed. But there are likely to be some pretty deep cuts in health, public assistance and education programs in the months ahead. Either that or what might be the longest budget deadlock in state history. Republicans have said they won’t vote for higher taxes. Democrats have said they won’t vote for deeper cuts to education or the safety net.

Without one or both of those things, there is simply no way to bridge a gap of the size that has opened up in California’s budget.

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