SAN FRANCISCO - California faces "huge budget shortfalls" for the next few years if it doesn't take steps to turn the tide, the state's nonpartisan legislative analyst reported yesterday.

The report was issued to review the budget proposals Gov. Arnold Schwarzenegger made last week when he called lawmakers into a special session to deal with the mounting budget problems.

The report from legislative analyst Mac Taylor paints an even more dire picture than the governor did last week when Schwarzenegger announced an $11.2 billion gap in the current year budget and proposed dramatic tax increases and budget cuts to close it.

"The state's revenue collapse is so dramatic and the underlying economic factors are so weak that we forecast huge budget shortfalls through 2013-14 absent corrective action," the Legislative Analyst's Office reported. "From 2010-11 through 2013-14, we project annual shortfalls that are consistently in the range of $22 billion."

The LAO's report said the governor's proposals were "realistic" and would achieve the aim of closing the budget gap both for the current fiscal year and the next.

Schwarzenegger proposed a temporary 1.5% sales tax hike for three years, and also called for broadening the sales tax to some services. He also proposed an increase in alcohol taxes and a new severance tax on in-state oil production.

Altogether, the governor estimates that the tax increases would raise $4.5 billion. He proposed $4.7 billion in budget cuts which, combined with the remaining general fund reserve, would put this year's budget back in balance.

The LAO declared his estimates to be financially realistic.

The special session has formally been underway since Thursday, though it has produced little more than a handful of press releases. The session brought back the current Legislature, the authority of which will end Dec. 1, when the lawmakers elected earlier this month are seated.

Current Senate president pro tem Don Perata, D-Oakland, has said the real deadline for this session is Nov. 23 because of Thanksgiving and the need to switch offices and update computer systems for the new session.

It remains to be seen whether lawmakers in special session can overcome the calculus that resulted in a 12-week delay in enacting the current budget. Tax hikes require a two-thirds vote, which would require a buy-in from at least a few minority Republicans.

The GOP didn't budge then on tax hikes and its leaders say they won't budge now.

According to the LAO, the budget problem will get worse the longer it takes to get a solution.

"If the Legislature has any hope of developing a fiscally responsible 2009-10 budget, it must begin laying the groundwork now," the report said. "We believe it must take major ongoing actions - reducing base spending and increasing revenues - both to close as much of the current-year gap as possible and to provide a head start on closing the 2009-10 shortfall."

The LAO also offered a menu of alternative tax hikes for lawmakers to consider, including increases in vehicle registration taxes and an income tax surcharge.

California issued $5 billion of revenue anticipation notes in October as part of a plan to issue a total of $7 billion of notes to manage cash-flow needs during the fiscal year.

Plans to sell the remaining $2 billion are untenable now without major actions on the budget, according to the LAO.

"We concur with the administration's estimate that, even if the state were able to obtain $2 billion more in Ran proceeds from investors during 2008-09, the general fund still would be unable to meet all of its payment obligations on a timely basis without additional remedial action by the Legislature," the report said.

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