Budget relies heavily on capital gains revenue
Neil Nisperos, Staff Writer
Posted: 08/13/2011 05:53:38 PM PDT

As market volatility continues, California residents may see further deep cuts to education and other state services as Sacramento’s income falls short of projections, lawmakers and financial experts said.

Gov. Jerry Brown and Democratic majority lawmakers approved in June a rare on-time $89 billion state budget that balances finances with a combination of cuts, new and increased fees, the elimination of redevelopment agencies, and the expectation of $4 billion in revenue.

But the state budget relies on the hope that wealthy residents could continue their months-long capital-gains spree that generated billions in unexpected revenue this year.

If market volatility continues and revenues don’t materialize by more than $1 billion, an additional $600 million in cuts to higher education, health and human services, and public safety would begin in January.

Chris Thornberg, founding principal at Beacon Economics, a Los Angeles consulting group, said market volatility “doesn’t bode well” for state finances.

Republicans said the revenue projections were overly optimistic.

“A big portion of the state’s budget comes from income taxes based on capital gains, and with the markets taking a big dump the way they have been, that means fewer financial gains and fewer income taxes for a state that already needed windfall gains just to make things meet,” Thornberg said. “Not only are they not going to make their windfall, it’s unlikely they’re going to meet budget projections. You add that up and it looks pretty grim unless something changes pretty rapidly.”

If revenues fall short by more than $2 billion, another $1.9 billion in education cuts would shorten the school year by seven days, eliminate home- to-school transportation, and reducing community college funds.

“The triggers being put into effect – that isn’t a probability, it’s maybe a possibility,” said state Sen. Gloria Negrete McLeod, D-Montclair. “I don’t want to be an alarmist. Of course, we’re all watching the stock market kind of implode. We certainly don’t want to see the triggers put in place, but then, we don’t know.”

Assemblywoman Norma Torres, D-Chino, said the “crystal ball is still foggy” and voiced hope for a return to recovery, but if the triggers are implemented, “there’s going to be a whole lot of hurt in our community.”

“I think there’s going to be a lot of people very disappointed and, unfortunately, not much we can do,” Torres said.

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