Introduction
On February 20, 2009 the Governor signed a new budget package that projected a $5.6 billion operating surplus and a $2 billion reserve for the General Fund at the end of 2009-10. On Friday the Legislative Analyst’s Office (LAO) updated its revenue forecasts, identifying a new $8 billion shortfall of estimated revenues for 2009-10. Absent any corrective actions, the LAO now projects that the state will face a $2.3 billion operating deficit and the General Fund will end the 2009-10 fiscal year $6 billion in the hole (with no reserve). And, the LAO estimates that the state will face huge operating deficits that will grow to $26.4 billion in 2013-14. The following table reflects the LAO’s projections for operating deficits over the next five years.
Additional Budget Risks
Also note that these projections assume that California voters will approve all of the ballot measures on the May 19, 2009 Special Election ballot. As such, there are very major risks associated with the existing budget plan. If the measures related to the lottery ($5 billion), Proposition 10 ($600 million), and Proposition 63 ($230 million) are defeated, the state will need to solve for an additional $5.8 billion hole in 2009-10.
Deficit Drivers
Even though the LAO’s expenditure estimates for 2008-09 and 2009-10 are similar to those of the enacted budget, revenue projections continue to decline rapidly. In February alone, receipts for the state’s big three taxes (Personal Income, Sales and Use, and Corporate Income Taxes) were collectively $815 million below the February forecast. Given that February has historically been a low-collections month; the LAO has translated this shortfall and other key economic indicators into an $8 billion deficit for 2009-10.
In addition, the outlook for both the state and national economies remains grim. Virtually all indicators of economic activity are negative. The revised gross domestic product (GDP) fell more than expected, large scale layoffs and increasing unemployment rates continue in 2009, foreign trade has slowed markedly, consumer spending continues a downward trend (car sales are down 40 percent from last year), and housing prices continue to decline.
Summary
State finances continue to struggle. Absent any corrective action (note that the LAO is extremely reluctant to recommend that the state raise any more tax rates), this $8 billion revenue drop will consume the budget’s $2 billion reserve and generate a new $6 billion shortfall for 2009-10. Even if all assumptions included in the budget package go as planned, the state’s operating shortfalls are projected to grow to $12.6 billion in 2010-11 and to $26.4 billion by 2013-14.
For more information, please contact Joseph Shinstock, Fiscal Consultant, at (916) 651-1501, or refer to our website at http://republican.sen.ca.gov/pubs.asp.
