Stock market free fall stokes fears
By Chris Levister –
California’s financial future and what happens in the state’s K-12 and higher education classrooms is tied more than in most states to the earnings of the wealthy who make their money on stock-market investments. That’s why state officials were understandably nervous after the stock market gyrated downward this week wiping away much of the year’s gains.
Such fluctuations have deepened the state's deficits in bad times. California has already fallen behind the revenue hopes that Gov. Jerry Brown and lawmakers used to patch the state's budget deficit in June, stoking fears Tuesday that deeper education cuts may be inevitable.
State officials predicated higher revenues on gains by upper-income earners. But with the market struggling, budget analysts are concerned that those have evaporated.
In nearly six weeks since Brown signed the budget, the Dow Jones Industrial Average has fallen 1,174 points, or 9.5 percent pushing many forecasters to revise their growth expectations downward.
Controller John Chiang said for the first month of the new fiscal year, California missed its $5.2 billion July General Fund revenue target by $538.8 million, or 10.3 percent.
To help bridge the deficit in the face of Republican tax opposition, Democrats relied on an optimistic assumption that the nation’s economy is improving, if but slowly and California would receive $4 billion more than previously forecast through June 2012.
“The assumption was that we would get that $4 billion from capital gains," which were strong when the budget was written,” said Brad Williams, former chief revenue forecaster for the Legislature. "A lot of that disappeared in the last week or so."
The state's collections from capital gains taxes have swung wildly in the last decade, from $3 billion in 2002 to $11.9 billion in 2007, and dropping to $2.6 billion in 2009.
If the economy remains sluggish and the $4 billion in revenue does not materialize, even deeper cuts in public schools, universities, libraries, child care, and services for the elderly and frail will automatically take effect.
"Every drop in revenues puts us closer to the drastic ‘trigger’ cuts that could be imposed next year,” Chiang said in a statement accompanying his July revenue report.
The Department of Finance has until December to determine whether the state is on track to hit its revenue target. Brown officials cautioned Tuesday that it is too early to judge whether that money will come in.
Department of Finance spokesman H.D. Palmer says a lot of things still have to happen before the trigger cuts kick in.
"The biggest is when we revise our economic and revenue forecast in the fall." State officials admit the impact may not reveal itself until September at the earliest because of when quarterly filers report their estimated tax liability.
But some school officials are already anxious. Scott Lay, president and CEO of the Community College League of California, said he will recommend to his districts that they assume California never receives that $4 billion.
Under current law, that means the state would cut $102 million from community colleges across the state. It also means colleges would impose a $10 per unit fee increase for the spring semester, on top of a $10 per unit increase already in place this fall.
Lay said he will ask legislators to delay the fee increase until next summer, and ask districts to shoulder the $30 million cut in other ways. He said it would be a logistical nightmare to ask students for more money after they have already enrolled in spring classes.
Among school advocates, there is a growing sense that lawmakers will face pressure to avoid K-12 cuts even if the revenues fall short. That could mean finding alternative cuts in January before K-12 reductions hit districts in February.
California's education cuts will kick in if finance officials determine revenue to be $2 billion or more below expectations as of December. If enacted, the $1.5 billion in school reductions could shrink the academic year by as many as seven days in some districts.
It could also mean finding other sources of revenue. Democrats insist this sets the stage for more partisan bickering with the GOP over tax increases or revisiting some of the controversial solutions in the Democrats' original plan, such as selling state office buildings.
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