California's budget shortfall may top $8 billion

SAN FRANCISCO (Reuters) - The $3 billion state budget shortfall California officials had recently discussed is swelling fast and may grow to more than $8 billion, school lobbyists said on Wednesday after a briefing by Gov. Arnold Schwarzenegger.

The Republican governor, according to representatives of the most populous U.S. state's education associations, said he would propose a combination of deep spending cuts and a sales-tax increase to close the widening budget deficit.

Schwarzenegger spoke of a fast-growing shortfall amid a "new reality" of a plunge in revenues as the state's economy slows, consumers rein in spending, the housing slump presses on and unemployment rises, said Brian Lewis, executive director of the California Association of School Business Officials.

"What the governor did say was that the $3 billion that had been bandied about by his administration had grown to somewhere between $5 billion and $8 billion and perhaps more than that," Lewis said.

"He said, 'I don't like taxes, but I don't see how we can avoid them,'" Lewis added. "But clearly he wasn't talking about trying to solve this gap with all revenues. He's looking at some kind of combination of revenues and cuts."

Schwarzenegger spokesman Aaron McLear said he could not comment on the private briefing, adding that the governor should have a firm estimate of the size of the state's budget shortfall by the end of the week.

The governor will then craft proposals for closing the gap and make them public next Wednesday when he officially calls for a special session of the Legislature to focus on the disarray in the state's current fiscal-year budget.

Schwarzenegger signed the spending plan into law on September 23, marking the end of California's longest-ever delay over a state budget. His signature brought the 85-day political drama over the budget to a close and closed a shortfall of more than $15 billion.

To get a final agreement, lawmakers gave in to his demand for a rainy-day fund that would be difficult for them to tap and agreed to Schwarzenegger's proposal to let the state sell debt backed by the state lottery system's future revenues, pending voters' approval.

The final agreement also denied Democrats who control the Legislature the tax increases they had sought and blocked Republicans' demands for deeper spending cuts than initially planned.

Administration officials and lawmakers acknowledged the agreement was a short-term fix as it failed to tackle California's core budget problem, its so-called "structural" budget imbalance.

The state's persistent inability to match spending and revenues is a major reason why Wall Street is reluctant to raise California's credit rating, which makes borrowing more expensive for the nation's biggest issuer of municipal debt.

A day after Schwarzenegger signed the budget agreement, the UCLA Anderson Forecast unit projected in a report that California's jobless rate will hold above 7 percent through next year, a grim forecast for the state's government, which is overly dependent on revenues from personal income taxes.

A "strong undercurrent of housing- and finance-generated weakness" is dragging down growth in the eighth-largest economy in the world, the forecasting unit said in its report said.

(Reporting by Jim Christie; Editing by Jan Paschal)