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California's Fix Won't Last Long

SAN FRANCISCO — Economists have a warning about California’s budget woes: They’ll be back.

Gov. Arnold Schwarzenegger and legislative leaders this week agreed to close a $26 billion hole in their fiscal 2009-10 general fund budget with spending cuts, raids on local revenues and accounting changes that will make it harder to balance the budget in future years.

“We’re going to have another budget problem as early as December or January,” when lawmakers start working on the 2010-11 budget, said Esmael Adibi, director of the Chapman University’s A. Gary Anderson Center for Economic Research. “The solutions offered here are not really addressing the structural problem. Most of the cuts are not permanent.”

The plan cuts $15.6 billion in state spending, but lawmakers agreed to a series of accounting moves, one-time revenues and temporary spending cuts to put off the problems until better times.

To raise revenue, the plan requires taxpayers to pay about $2.3 billion of fiscal 2011 taxes in this fiscal year. It also borrows $1.7 billion from local governments that will be repaid over three years. By contrast, the state will get a permanent revenue boost of $100 million by allowing more oil drilling off the Santa Barbara coast.

To cut expenses, the state would pay its payrolls a day late for June 2010 in July, making them a fiscal 2011 expense.

The state saves another $1.3 billion through worker furloughs that temporarily decrease expenses but don’t reduce payroll head count. Education spending would decrease about $4.3 ­billion, but the agreement ­requires ­California to pay schools back as the economy recovers.

Lawmakers were set to vote on the budget plan last night after The Bond Buyer’s press time. Legislative leaders predicted that the agreement would pass, despite opposition from local governments opposed to raids on their tax revenues and interest groups that opposed spending cuts.

The end result is that the state will have to pay billions of this year’s expenses next year and in the years that follow. Economists said that could work if the economy quickly snaps back from this recession, but they don’t expect that to happen.

“It’s a risky bet,” said Eduardo J. ­Martinez, a senior economist covering the California economy at Moody’s Economy.com in West Chester, Pa. “From our estimation, through 2011, average quarterly growth in personal income is going to be less than 0.5%, so it’s going to be ­marginal.”

Personal income taxes, which provide more than half of revenue, have reflected much of the volatility in California’s revenues over the past year, repeatedly confounding forecasters as the economy, capital gains and employment fell more than expected. In fiscal 2008-09, personal income tax collections fell by a fifth from the year before.

The good news is that private economic forecasters expect the state’s economy to begin to grow by the end of this year or early 2010. California’s economy is the world’s eighth largest with roughly the same size economic output as Brazil, a nation of 191 million people.

“We still have some more job losses to go, but in terms of economic activity, we are getting a lot closer to the end of the recession,” said Jerry Nickelsburg, a senior economist at the UCLA Anderson Forecast.

“All of the indications are that early in the fall, if not by the end of the summer, we’re going to start seeing the end of the contraction,” he said.

The forecasters interviewed for this story held a range of views about the precise timing of the recovery in economic growth and how long the lag would be until job creation starts in earnest, but all of them expected a resumption in growth within the next 12 months and expected job growth to return a few months after that.

California’s unemployment rate held at 11.6% in June. The jobless rate has more than doubled over the past two years, but June was only the second month without an increase in joblessness since ­November 2007.

“The fly in the ointment is that we will be losing public sector jobs, and that will certainly be a drag on the California economy,” Nickelsburg said.

He predicts that the continuing budget woes will lead to about 60,000 job cuts at state agencies and schools. “The public sector has to shrink a fair amount, and that means a lot of jobs,” he said.

Those job losses will keep total payrolls flat for 2010 in his forecast, but private sector payrolls are likely to be growing next year.

Despite the lag between the onset of economic growth and job creation, economists are optimistic about the state’s economy, in large part because the state’s battered housing sector has finally stabilized. 

“We’ve seen inventory diminishing,” said Mark Schniepp, an economist and the principal of the California Economic Forecast, a consulting firm. “Prices have hit bottom, and now they’re starting to rise.”

California home sales fell to a seasonally adjusted annual rate of 254,000 in October 2007, according to the California ­Association of Realtors.

They’ve since doubled to more than 500,000 a month and have held above that level for the past nine months.

The rise in sales and a near-halt in new construction has helped correct inventory levels in the sector, despite ongoing foreclosures that add homes to the market at depressed prices.

The months supply of homes available for sale fell to 4.2 in May, according to the realtors’ group. That’s down from a peak of 16.6 months supply in January 2008, and it’s below the average inventory level since January 2000, which is 4.9 months of supply.

The median price paid for a home last month was $246,000, according to MDA DataQuick. That’s down 25% from a year earlier, but it’s up 7% from May.

“The California housing market definitely is stabilizing,” Nickelsburg said. “The excess appreciation that occurred during the bubble is all gone and has indeed over-corrected, which is typical of the cycle.”

Combined with gradually improving economic data on the national level and the promise of significant federal ­economic stimulus projects, that’s led to a good bit of optimism about California’s ­economic prospects over the next couple of years.

While housing may not boom again soon, Martinez points out that California’s high-technology companies are already posting positive earnings surprises, which could help the San Francisco Bay Area lead the state’s private-sector economic recovery.

But back in Sacramento, the state capital, the woes are likely to continue for some time. The lag between economic growth and job creation will combine with the state’s failure to rebalance its ongoing expenditures and revenues to create stress on the budget for the next year to 18 months, according to Schniepp.

“Don’t expect personal income taxes to come back until the spring or mid-2010, when we start to show some really clear growth,” he said. “The state’s in for a mess this year and next year.”

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