Cuts Loom as California Revenue Gap Reaches $1.5B

SAN FRANCISCO — California’s revenues are running a billion and a half dollars below budget estimates, making it more likely the state will make further spending cuts.

Controller John Chiang Thursday said October revenues came in $810 million below projections in the state budget, pushing the gap this fiscal year to $1.5 billion.

“I think it shows the tenuousness of the recovery to date and the risks that are still very much apparent in the California budget,” said Fitch Ratings’ analyst Douglas Offerman. “The state is seeing unfold a situation that it can at least partly respond to through the trigger cuts.”

Gov. Jerry Brown signed a budget in June that assumed revenue would come in $4 billion higher than forecast to help close an almost $10 billion gap. If it falls short, and depending on the size of the shortfall, cuts to education and other services will kick in.

The state Legislative Analyst’s Office and the Department of Finance will make separate appraisals of future revenue estimates for the fiscal year that will determine whether cuts will be made. The LAO is expected to release its report next week and the Finance Department before Dec. 15.

State officials expect more than half of revenues will come in the second half of the fiscal year as such major receipts as final income tax payments roll in.

If the shortfall is less than $1 billion, no cuts will be triggered. But if it is between $1 billion and $2 billion, a first round of cuts of around $600 million starts Jan. 1. That money would mainly come from trimming allocations to state universities and health and human services.

And if the shortfall is $2 billion or more, a further $1.9 billion of belt-tightening will begin, which would include reducing K-12 school days by up to a week.

Rating analysts have mostly figured the potential for cuts into their ratings.

Moody’s Investors Service analyst Emily Raimes said in an October report that projections up until then made it likely that a least a first round of cuts would be made. She said the triggered budget reductions would unlikely be enough to fill the gap and may be added to next year’s budget deficit.

The state is also facing a series of legal challenges to its budget decisions that, if successful, could result in additional holes in this year’s spending plan. Officials expect to take $1.7 billion from redevelopment agencies, a plan that is being challenged in the state Supreme Court.

California is the lowest-rated state in the nation, according to Standard & Poor’s and Fitch, both of which assign A-minus ratings. The state carries an A1, two notches higher, from Moody’s.

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