California Governor Jerry Brown

By Kevin Yamamura
Published: Tuesday, May. 15, 2012 – 12:00 am | Page 1A
Last Modified: Tuesday, May. 15, 2012 – 6:17 am

Gov. Jerry Brown announced Monday that the state budget deficit had grown by a remarkable 70 percent since January, but fiscal experts said the economy had little to do with it.

They instead blamed a bad marriage of volatile capital gains and political intransigence that led state leaders last year to count on a huge upswing in revenues that never materialized. At the same time, corporate tax changes from 2009 appear to have cost California more than state officials ever realized.

The Democratic governor says the general fund deficit has mushroomed from $9.2 billion to $15.7 billion. Most of the widening gap comes from acknowledging that his previous forecast was too optimistic, a concern that economists voiced last summer.

“I think the sense we were all getting last year was that we were getting to the end of our rope in solutions,” observed Brad Williams, a fiscal forecaster who previously worked for the Legislative Analyst’s Office. “This was what was left – an aggressive forecast.”

The recession has had a lasting impact on a general fund budget that dropped from $103 billion in 2007-08 to $86 billion this year.

But nothing significant has changed in the California economy this spring to warrant such a dramatic growth in the deficit.

While housing and government jobs have yet to experience much recovery, taxes from paycheck withholding and sales are slowly growing. Export and high-tech sectors are robust.

“There’s nothing wrong with the economy,” said Chris Thornberg of Beacon Economics. “The problem here is the process. Simple as that.”

The deficit also grew because federal judges and administrators rejected cuts to Medi-Cal and in-home care programs. The state owes more to schools in 2012-13 because of how funding formulas work, another symptom of the faulty revenue projection.

A year ago, Brown issued a different May budget on an upbeat note after state coffers overflowed in April 2011.

That tax boost put the state on a higher glide path, but Democratic lawmakers and Brown doubled down when May and June also saw more revenues and they could not persuade Republicans to support a tax measure.

They turned to more optimistic projections after the governor vetoed Democrats’ first budget, which contained a sale of state buildings, use of First 5 early childhood money that has since been blocked by a judge and a questionable maneuver to pass a quarter-cent sales tax by majority vote.

Their eventual budget deal had the state counting on another $4 billion more in 2011-12. Brown’s Department of Finance now predicts the state won’t collect the $4 billion and will fall an additional $1.2 billion short.

Capital gains have become an increasingly significant part of California revenues over the past two decades, and with it comes instability in state revenues and forecasting.

The upcoming sale of Facebook stock is expected to net $1.5 billion for the state through June 2013, and possibly an additional $400 million if voters pass the governor’s tax hike on wealthy earners.

Brown said Monday he thought last year’s actions were “reasonable when we did it.” He blamed the missed projection on the volatile nature of the state’s tax system and called the state budget “a pretzel palace of incredible complexity.”

Twice, he referenced JPMorgan Chase CEO Jamie Dimon, whose firm recently revealed a $2 billion trading loss, calling that “a big miss.”

“The capitalist system is not coincident with your expectations of exactitude,” Brown said. “It doesn’t play out like we may want it to.”

To balance this year’s budget, Brown has proposed a mix of spending cuts, fund shifts and his $8.5 billion tax hike on sales and wealthy earners. Some of the deepest reductions hit poor Californians, such as stricter requirements in welfare-to-work, lower payments to Medi-Cal providers and a reduction in Cal Grants. He also has proposed trimming the 40-hour workweek by two hours for state workers.

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