Bloomberg News

California Tax Revenue Decline Inches State Toward Trigger Cuts

October 11, 2011

Oct. 11 (Bloomberg) -- California took in less revenue than needed to stay within its budget last month, leaving the most- populous U.S. state at risk of triggering automatic cuts to universities and caregivers for the elderly and disabled.

The state had $705 million less on Sept. 30 than Governor Jerry Brown and Democrats projected in their budget for the year that began July 1, Controller John Chiang said yesterday. The $86-billion spending plan included a series of reductions to be activated if revenue falls below certain levels.

The first tier, if the shortfall is $1 billion, would trim University of California and California State University budgets by $100 million each, increase community-college fees by $10 per unit and cut in-home services for the elderly and disabled who need help. In December, Brown’s finance department will estimate whether the rest of the year’s revenue can meet the original projection.

“The potential for revenue shortfalls is precisely why the governor and Legislature included trigger cuts in this year’s state spending plan,” Chiang said in a statement. “September’s revenues alone do not guarantee that triggers will be pulled. But as the largest revenue month before December, these numbers do not paint a hopeful picture.”

If the gap widens to $2 billion, it would mean a seven-day reduction in the school year to save $1.54 billion and an end to $248 million in home-to-school busing subsidies.

California’s situation has parallels in Washington, where a congressional supercommittee must agree on at least $1.2 trillion in savings or the U.S. will face automatic cuts of that amount.

Expiring Taxes

Brown and Democrats enacted the triggers after failing to get Republican support for a referendum that would have extended expiring taxes and fees to help erase what was a combined $26 billion shortfall. To balance the budget, lawmakers cut spending by $12 billion. They also counted on an equal amount of higher revenue, including $4 billion Brown and fellow Democrats said the recovering economy would deliver.

The additional revenue “was based on strong cash collections in late fiscal 2011 that were exceeding the governor’s May 2011 forecast,” Fitch Ratings said yesterday when it affirmed the state’s A- rating with a stable outlook. “This trend has weakened.”

The December decision on whether the triggers will be reached won’t be based on the level of revenue at the time. Rather, it will depend on an economic forecast for the fiscal year that Brown’s office will begin conducting next month. Tier one cuts would take effect Jan. 1; second-tier cuts, if needed, would begin Feb. 1.

Not Yet ‘Trend’

“You can’t build a trend off of one month of cash reporting,” said Brown’s budget spokesman, HD Palmer. “The biggest influence on the triggers is going to be later this fall, when we do a full-blown economic forecast that is in turn going to affect our updated revenue forecast for the entire fiscal year.”

“The bulk of the $4 billion, to the extent that it’s going to be realized, will be coming in between December and June,” Palmer said. “We are still in the early innings.”

California’s September revenue came in $301.6 million below estimates, Chiang said in a report yesterday. July was $538.8 million less than forecast, he said Aug. 9. Revenue in August was $135 million more than expected.

Brown’s finance department said almost half of September’s decline was a timing issue, because $120 million was transferred to the Public Transportation Account for sales taxes on diesel fuel on Sept. 30 instead of in October, when the move had been forecast.

Confidence Shaken

When lawmakers agreed on the budget in June, it appeared the U.S. economic recovery was picking up pace. But the continuing debt crisis in Europe and the impasse between Congress and the White House over raising the debt ceiling shook confidence in the U.S. economy, said Stephen Levy, director and senior economist of the Center for Continuing Study of the California Economy.

“Back then, I thought they had a chance,” Levy said in a telephone interview. “It’s still possible, but it won’t be because of a strong rebound in the California economy. It would be because of very strong profits and income-tax receipts in Silicon Valley.”

California’s unemployment rate, which fell to 11.7 percent in May, was back up to 12.1 percent in August. In the first three months of the fiscal year, the only revenue to exceed projections is personal-income taxes, at $502 million more than estimated. More than half of California’s revenue comes from income taxes.

University Cut

The 23-campus California State University system would lose $100 million of its $7.2 billion budget under the first tier of cuts. The 420,000-student system has been reducing expenditures by freezing faculty wages, cutting the number of part-time lecturers, scaling back student services and consolidating technology, said a spokeswoman, Claudia Keith. That would come in addition to $500 million cut in the budget passed in June.

“If it’s a one-time cut, our campuses have been planning for that rainy day,” Keith said by telephone. “If it’s a cut to our base, that’s a different conversation.”

In-Home Supportive Services for about 450,000 elderly Californians would be cut $100 million. For the average user, the reductions equate to losing about 20 hours of aid a month, from the current 85 hours, said Karen Keeslar, executive director of the California Association of Public Authorities for IHSS.

‘Devastating’ Cuts

“The level of cuts is so devastating that most of us see people moving out of their homes into nursing homes,” she said by telephone.

A Field Research Corp. poll released last month found that voters by more than a 2-to-1 margin disapprove of the trigger cut provision.

California Treasurer Bill Lockyer is scheduled to sell $483.5 million of tax-exempt public-works bonds beginning Oct. 13. California debt yields about 1.14 percentage points more than top-rated municipal debt, compared with a peak yield spread this year of 1.47 percentage points in June, according to data compiled by Bloomberg.

When California sold $2.4 billion of general-obligation bonds last month, the debt was priced to yield 3.17 percent on 10-year maturities, as much as 109 basis points above top-rated tax-exempt debt. That compares with a 160 basis-point premium on similar bonds sold in March 2009. A basis point is 0.01 percentage point.

“It’s premature to be talking about any level of hope or lack thereof,” said Tom Dresslar, a spokesman for Lockyer. “The most important thing for an investor to understand is that we have those triggers.

‘‘We have a mechanism if the revenue projections don’t pan out,’’ he said. ‘‘We are not going to be the old California where we are flailing around in a political maelstrom for months on end. We now have a system in place to deal with revenue shortfalls.’’

--Editors: Pete Young, Jeffrey Taylor

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net mmarois@bloomberg.net; James Nash in Sacramento at jnash24@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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