SAN FRANCISCO — California will likely face a deficit of almost $13 billion in the next fiscal year, according to a revenue forecast released Wednesday by the Legislative Analyst’s Office.
The report also said revenues and transfers in the current fiscal year that began July 1 are likely to come in $3.7 billion below projections used by lawmakers to craft the budget, potentially resulting in $2 billion of mid-year budget cuts.
The nonpartisan LAO said the impact of the current-year revenue shortfall, coupled with a possible $10 billion operating deficit in the general fund for fiscal 2013, could result in a $12.8 billion deficit next fiscal year. Its forecast assumes no inflation increases and that budget cuts remain in place.
“Even under this modest budget scenario, the state faces an ongoing, multibillion-dollar annual deficit, even as state revenues expand,” the report said. “Unfortunately, there are few easy options left for balancing California’s budget.”
The office’s projections also assumes the state will leave budget and retirement obligations unpaid through at least 2017.
However, the LAO noted that California has made progress after just last year facing ongoing budget deficits of around $20 billion per year.
If lawmakers are able to finally tackle short-term budget problems in the next few years, the analyst’s office said it could finally “turn to the serious long-term fiscal issues of the state’s accumulated budgetary obligations and unfunded retirement liabilities.”
To get the current budget passed, lawmakers assumed $4 billion in additional revenue would appear, and that automatic cuts would be triggered if the revenue didn’t materialize.
The LAO now predicts only $300 million of that $4 billion will come in.
According to the analyst’s forecast, the state would be forced to impose a first tier of “trigger” cuts and three-fourths of a second tier of cuts that combined would total $2 billion in reductions to various state programs.
But the analyst’s report is only one piece of the formula used to determine mid-year budget reductions. The Department of Finance will release its own forecast by Dec. 15 and the highest of the two will be used to determine the level of cuts.
On Monday, the department said revenues for the first four months of fiscal 2012 were $1.26 billion, or 5%, below projections after October receipts came in $608 million below estimates. The state controller’s office said earlier that the gap stood at $1.5 billion.
Finance officials said for the cuts to be avoided, receipts from personal income and corporate taxes in the second half of the year would have to fill the bulk of the revenue hole.
Even though the current budget will likely be trimmed, rating analysts have mostly figured the possible retrenchment into their evaluations.
“Now that the LAO analysis has confirmed what the recent revenue trends suggested was likely — that mid-year cuts may well be triggered — our analysis will focus on how effective this aspect of the budget proves to be,” said Standard & Poor’s analyst Gabriel Petek.
Petek said there could be political and practical challenges to implementing the mid-year cuts.
California is the riskiest state credit, according to Standard & Poor’s and Fitch Ratings, both of which assign A-minus ratings. Moody’s Investors Service rates the state A1, two notches higher.
The state’s general obligation bonds have traded at a spread of 105 basis points on average for a 10-year bond compared to a triple-A rated GO bond over the last three months, according to Thomson Reuters.