Budget analyst: California faces huge challenges through 2015 amid slow economic recovery

California faces $20B deficits for years to come

SACRAMENTO, Calif. — Despite multiple attempts to balance California’s budget, the state can still expect to confront shortfalls approaching $20 billion during each of the next five years, according to a long-range forecast released Wednesday.

The report by the nonpartisan Legislative Analyst’s Office warned that the nation’s most populous state will face huge fiscal challenges even as the national economic outlook improves and the state economy heads toward a recovery in a year or two.

In his report, Mac Taylor, the Legislature’s nonpartisan budget analyst, urged Gov. Arnold Schwarzenegger and lawmakers to act swiftly on permanent solutions by making deeper reductions in all state programs and looking to raise revenue.

“The sooner they act, the better,” Taylor said. “Because often times, it takes a few months to implement expenditure reduction. They’re going to have to focus on long-lasting solutions.”

The report, intended to help lawmakers craft the new budget for the fiscal year starting next July, elicited partisan response from lawmakers that will likely set the stage for another round of a long budget fight.

California will face a nearly $21 billion budget gap over the next year and a half, extending a fiscal crisis that already has led to steep cuts to public schools, social services and health programs. The projected deficit amounts to nearly a quarter of the state’s $84.6 billion general fund budget.

In anticipation of more budget troubles, a committee of the Board of Regents at the University of California system moved Wednesday to increase student fees by 32 percent over two years. The full board will decide Thursday whether to approve fee increases by $2,500 in two stages by 2010.

In his state forecast, Taylor blamed the recession and poor decisions by the governor and state lawmakers during the past year. Many of the steps they said would patch previous budget deficits have failed, creating a $6.3 billion hole in the current fiscal year ending June 30.

“We are concerned that a lot of solutions just aren’t panning out,” Taylor said.

The shortfall will expand to $14.4 billion for fiscal year 2010-11, forcing state leaders to make even more painful cuts, he said. The forecast assumes no cost-of-living increases for state workers and programs. Increases were suspended by the Legislature this year.

Schwarzenegger, who was in Italy on Wednesday, said he does not think the state should raise taxes, despite the widening gap. He has warned the toughest cuts are still ahead because the temporary tax increases will begin to expire at the end of 2010, while federal stimulus spending will begin to run out a year after that.

“I think it is very important that we do not raise taxes,” he said. “I think it would be bad for the economy right now. We have to live within our means.”

Democratic leaders who control a majority of the state Legislature indicated they would look to taxes to help bridge the gap.

“The numbers cry loudly for California to focus on rebuilding our tax base,” said Senate Majority Leader Darrell Steinberg, D-Sacramento. “We need to protect our schools and universities, so as we create high-wage jobs, we produce a workforce able to fill them.”

Assembly Republican Caucus Chair Cameron Smyth, R-Santa Clarita, said members of the minority party — whose votes are needed to muster a two-thirds majority to pass a tax increase — have no appetite for such hikes.

“This deficit will not be solved on the backs of California taxpayers,” Smyth said in a statement.

Sen. George Runner, R-Lancaster, said the state should reconsider a proposal to allow off-shore drilling, which would boost revenues for years to come, and repealing burdensome regulations.

Taylor did not lay out specific remedies but offered strategic advice. He suggested lawmakers consider closing tax exemptions and extending temporary taxes such as the 1 percent vehicle license fee while seeking longer-lasting and more realistic budget cuts.

They also should consider asking voters to override previous ballot initiatives involving early childhood development, after-school programs and mental health to give lawmakers greater budget flexibility.

The options for Schwarzenegger and lawmakers are limited to spending cuts, higher taxes or borrowing. Tax cuts and borrowing appear to be in disfavor after taxes were raised earlier this year and tens of billions of dollars were added to the state’s credit card during Schwarzenegger’s tenure.

Since February, California has made nearly $60 billion in adjustments over two fiscal years. Those have taken the form of cuts to education and social service programs, temporary tax hikes, and adding money from the federal stimulus package.

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Associated Press Writer Colleen Barry in Milan contributed to this report.