California's budget gap won't close for long

By Jim Christie - Analysis

SACRAMENTO, California (Reuters) - Even if California Governor Arnold Schwarzenegger and top lawmakers quickly plug a $26.3 billion deficit to balance the state's budget, the state's weak revenues signal that a new shortfall will emerge.

Schwarzenegger and lawmakers say they are near a deal to balance the budget, even though a hoped-for agreement did not emerge on Wednesday because of a part of his plan to suspend a law on school funding.

A balanced budget for the fiscal year that started July 1 would allow the state to resort to traditional borrowing, providing a steadier supply of cash at a better price than the unorthodox IOUs it has been forced to issue in order to conserve cash.

But a balanced budget is seen as fleeting because California's economy, which is reeling from high unemployment and the recession, will remain in the dumps for some time. Closing the current shortfall does not account for further deterioration in the economy -- and revenue -- that many economists expect.

"It will be horrible next year," said economist Steve Levy of the Center for the Continuing Study of the California Economy.

The UCLA Anderson Forecast unit last month said in a report that California's economy is in for a "continued rough ride for the balance of 2009 and is not going to see economic growth return until the end of the year." The unit also projected the state would suffer double-digit unemployment until 2011.

California's revenues from personal income tax collections, its main revenue source, are posting their worst decline since the Great Depression.

"By no stretch of the imagination is it done," said Christopher Thornberg, an economist at Beacon Economics in Los Angeles. "This isn't going away any time soon."

RETAIL SALES TAXES WEAK

Orange County Supervisor John Moorlach said retail sales tax collections also will be weak for some time as consumers rein in spending.

Moorlach said he sees that happening all across Orange County, in Southern California, home to the subprime mortgage industry whose loans helped fuel the housing boom earlier this decade.

Many of the industry's former employees are living on bare-bones budgets and their absence from shopping malls will add strain to both local and state finances, Moorlach said.

"Our social services offices have seen a lot of former mortgage brokers applying for food-stamps and welfare," he noted, adding that the number of individuals and businesses in his county seeking bankruptcy protection rose 62 percent in May from a year earlier and 5.4 percent from April.

"Let's just hope the bottom (of the recession) is getting closer and closer," Moorlach said.

WALL STREET CONCERNED