Treading Water
Sep 1, 2008 12:00 PM, By Jennifer Popovec
California has more expenses than revenue. And that's causing a fiscal headache for Gov. Arnold Schwarzenegger, who is seeking approval of his 2008-2009 budget. State lawmakers were supposed to have approved the budget by July 1, but as of mid-August, they had failed to do so — as they have all but four times over the past two decades.
The Golden State, boasting the largest population in the United States with 36.4 million residents, has a whopping budget deficit of $22.2 billion — the largest in the nation in terms of both total dollars and amount per taxpayer. New Jersey is a distant second with a proposed budget deficit of $3.5 billion.
In an effort to reduce expenses and prod state lawmakers to quickly approve the budget, Schwarzenegger ordered his administration to lay off thousands of part-time employees and temporarily slash the pay of most full-time staff. He also imposed a hiring freeze and restricted overtime pay.
More than 10,000 government employees have lost their jobs and nearly 200,000 employees could have their pay cut to $6.55 per hour, the federal minimum wage, until a budget is signed. As of mid-August, the pay cuts had not taken place and Schwarzenegger has filed a lawsuit to force cuts in state workers' salaries each time legislators miss their deadline.
While the budget brouhaha takes center stage in the state's capital, outside of Sacramento, Californians are more concerned about the underlying cause of the budget deficit rather than the impact of the government job cuts and pay reductions.
California Credit Union League (CCUL) economist and a former economist with the U.S. Department of Labor Terrin Griffiths doesn't expect Schwarzenegger's cuts to have a tremendous impact on the economy because we've been hit so hard by the housing slowdown. “There are bigger issues at play here — the housing crisis and the national economy,” says Jeffrey Neustadt, president of Portfolio Development Partners LLC, a Walnut Creek, Calif.-based shopping center developer. “Retailers and retail developers are making their decisions based on those things, rather than the budget and the job cuts the governor is proposing.”
Declining revenues
The economic forecast underlying Schwarzenegger's budget assumes California will feel the effects of the economic slowdown more than the rest of the nation, according to the Legislative Analyst's Office, a nonpartisan group that evaluates the state's budget. The administration says the state's economy will slow this year and there will be a slight loss in jobs while personal income will rise 4.5 percent. As a result, economists argue that the state has already tilted into a full-fledged recession. “There are no strong markets in California — there are only less weak markets,” says Christopher Thornberg, principal of Beacon Economics, a Los Angeles-based consulting firm.
The firm, which specializes in analyzing the national and local economies, noted most of California's economic woes can be directly tied to the housing slowdown. California had some of the highest appreciation in home values during the boom. Over the past two years, home prices have fallen by as much as 40 percent in some parts of California, according to Thornberg.
The falling home prices have a direct correlation to the region's gross product, notes Norm Miller, an economist and director of academic programs at the Burnham-Moores Center for Real Estate at the University of San Diego. For every 10 percent decline in home values, the gross metro product (GMP) decreases by about one percent. And, every one percent decrease in GMP translates into a drop in retail sales of about seven cents per dollar.
The housing crisis has also contributed to decreased property tax revenues, Miller says. And, since construction has slowed, local governments are seeing decreasing development impact fees, which range from $45,000 to $185,000 per housing unit.
Meanwhile, in July the state's unemployment rate rose to 7.4 percent compared to 5.4 percent the same month a year ago;. It was 4.9 percent in July 2006, according to the U.S. Bureau of Labor Statistics. As a result, from July 2006 to July 2008, income tax revenue in the state fell $1.3 billion, according to the California Department of Finance.
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