OS ANGELES, May 11 — The fury of last year's dot-com bust may be fading from memory, but its effects are proving far more severe than anyone had predicted even a few months ago, state officials and economists say. Posted on 05/11/2002 4:13:28 PM PDT by sarcasm
OS ANGELES, May 11 — The fury of last year's dot-com bust may be fading from memory, but its effects are proving far more severe than anyone had predicted even a few months ago, state officials and economists say.
Gov. Gray Davis and state finance officials are to release updated figures for the state budget on Tuesday, and economists are predicting that they will show a potentially catastrophic deficit of $20 billion to $25 billion for the current fiscal year, which ends June 30, and the next.
The shortfall could well force the state and local governments to slash an array of services, including police protection and mental health, state and local officials say. The California Legislature is expected to spend most of the summer in a brutal political battle over who will have to sacrifice the most.
Nearly every state has budget problems, but California's potential deficit is larger than the entire budgets of most states. California's general budget is about $80 billion.
State finance officials began expecting a problem months ago, given the downturns in the technology industry and the stock market. In January they predicted a shortfall of $12.5 billion. Now, with most tax returns tallied, the figures have mushroomed. The principal cause, the officials say, is not the overall economic malaise, or even the terrorist attacks, but plunging tax revenues from stock options and other capital gains, which evaporated when the dot-com bubble burst last year.
The total income reported by California taxpayers from stock options and capital gains rocketed to roughly $200 billion in 2000 from $25 billion in 1994, state officials say. Then last year it fell to less than $70 billion, a decline that will reduce state tax revenues this fiscal year by $11 billion to $15 billion.
"Everyone was taken by surprise," said Kathleen Connell, the state controller, who has been forced to prepare an extraordinary $7.5 billion short-term bond offering next month to close the state's financial gap. "The diminished revenue was startling. And we don't see this as a single-year problem."
In recent weeks, local governments and their lobbyists in Sacramento have been scrambling to find ways to protect basic services and prevent the state from forcing the localities to absorb the brunt of coming budget reductions.
Making matters worse, the problem has surfaced in an election year, when the governor and the Legislature will be particularly reluctant to make painful budget cuts or to raise taxes. Those constraints have put many officials in the awkward position of both playing down the severity of the problem and stressing that it will require extraordinary measures to fix.
"It's not a crisis," said Tim Gage, director of the Department of Finance. "It's a significant challenge. No one really saw what the magnitude of that drop was going to be. The problem is to close the gap with the least damage, to cushion the otherwise devastating impact if we just made the cuts directly to programs."
Local governments are particularly vulnerable because they have two basic sources of income, local taxes and tax revenues passed down from the state, and many localities expect to be hit on both fronts.
For example, Santa Clara County, which includes Silicon Valley, faces an $85 million budget gap because of plummeting revenues from things like property transfer taxes, sales taxes and vehicle license fees.
Unemployment has gone to 7.7 percent from less than 1 percent two years ago, and now the government is preparing for potentially steep reductions in the money it receives from the state, which accounts for 43 percent of its annual revenues.
"I've been doing this for 26 years, and I've never seen anything like this in terms of how quickly things have turned," said Richard Wittenberg, the county executive. "It's been a free fall, and we haven't had much time to prepare."
He said services like health care, a program providing health insurance for children and welfare programs were likely to face cuts.
Richard Averett, finance director for the tiny city of San Carlos, south of San Francisco, said he was preparing for cuts in recreation, senior programs, the library system and police protection.
Even rural counties are expecting the worst. Fresno County, for instance, in the San Joaquin Valley, is concerned about potential cuts in state fire protection in its forests. Los Angeles County, which has nearly 10 million people, is particularly concerned about potential cuts in the money it receives for its extensive health programs, which focus on the burgeoning immigrant community.
Butte County, in Northern California, is one of the poorest in the state and has been on the verge of bankruptcy for years. Officials there worry about even modest cuts.
"We're in no position to bail anyone out," said Paul McIntosh, the chief administrator for Butte County. "We're just hoping we'll have some flexibility in how we can deal with this because we don't have anywhere else to dig."
The only time the state came close to this situation was in the early 1990's, when there were rampant layoffs in the aerospace industry. The revenue shortfall reached $14 billion in fiscal 1991, a gap that was closed, in large measure, by taking money away from local governments.
The problems are a reminder of just how unusual the 1990's were in California. While poor and working class immigrants flooded into the state, the wealthiest residents simply grew wealthier, laying the groundwork for the current problem.
The top 5 percent of taxpayers accounted for 22 percent of total personal income in California in 1980. By 2000, the top 5 percent of taxpayers — with gross incomes of $150,000 or more — accounted for 42 percent of total personal income.
When the stock options and portfolios of that tiny slice of the population collapsed, so did the state budget.
State officials are not in the business of making stock market forecasts, but they are working hard on their economic predictions and they expect little relief soon.
"If there is no real economic growth until the end of the fourth quarter, there will be no revenue growth to help out on next year's budget," said Ms. Connell, the state controller. "We could be dealing with this for three or four years."
When faced with revenue loss or the need for a tax increases the politicians always scare people by saying the police and fire services will be cut. They never mention the pork programs because they don't even want people to know about them and those are the pay-back funds for the big contributors.
Exactly ! ... How about cutting out things like the needle- supply programs ?
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