HOWARD FINE

Staff Reporter

After a long absence, the government budget surplus returned in 1998 at least on the federal and state level. Local budget coffers also improved this year, enabling local governments to dig out of deep financial holes.

But with much of the rest of the world in financial turmoil and signs of an economic slowdown lurking on the horizon, will the good times continue to roll for the public sector in 1999?

Economists and budget officials say the answer is a qualified yes. Revenues at all levels should continue to tick upward, albeit at a slower pace than in 1998.

“Governments should not expect to see the growth rate in revenues that they have over the past couple of years,” said Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University. “For those government entities with a surplus, it means the surpluses will be smaller than they would have been; for those with deficits, it means those deficits will likely grow once again.”

But economists and government officials warn that if the global economic crisis continues to spread, or if the U.S. stock market goes through a prolonged crash, all bets are off.

“If we haven’t hit the bottom internationally in the next year or so, then we might have to look at things in a different light,” said Timothy Lynch, administrative deputy controller for the city of Los Angeles. “That’s the point when you start talking about closing factories and the U.S. no longer being an island in the global storm.”

In such a scenario, the local, state and national economies would be plunged into a full recession, and budgets at all levels of government would probably lurch back.

So far, though, the talk is mostly of a slowdown in the rate of growth, not a contraction. And, for the most part, such a slowdown has been factored into most of the government revenue forecasts for the fiscal years ending in 1999 and 2000.

The state’s chief economist, Ted Gibson, projected that personal income growth in California would slow from 7.2 percent for the fiscal year ended June 30 to 5.7 percent for the current fiscal year and 5.0 percent in the 1999-2000 fiscal year.

Gibson projects that the state budget surplus, which was $2.0 billion when the budget was signed last month, will fall to $1.4 billion for the current fiscal year and remain at that level for the 1999-2000 fiscal year. (The original state budget surplus of $4.4 billion was sliced in half with the passage of tax cuts and additional spending measures in the last few weeks of the Legislative session.)

On the national level, the projections call for a slowing in the growth of the budget surplus for the next two or three years.

According to August budget update from the Congressional Budget Office, the growth rate in the nation’s gross domestic product will slow to 2 percent during the second half of 1998 and the first half of 1999, down from the 4 percent pace of 1997.

The slower growth, the CBO says, will cause the budget surplus projected at $80 billion for the fiscal year ending September 1999 to level off in 2000 at $79 billion. The surplus would then increase only slightly in 2001 to $86 billion. However, in 2002, the budget surplus is projected to jump to $139 billion.

While surpluses are expected to remain the rule at the national and state levels, local government budgets are more precarious, and it wouldn’t take much of a slowdown to put them once again into deep holes.

The county and many cities within the county including the city of Los Angeles have structural budget deficits that would only be aggravated by a slowdown.

“Structural deficit” means that projected tax revenues are not sufficient to meet government expenses. Typically, they occur when local governments are unwilling to pass tax increases and rely on such things as federal grants and public utility revenues to make up deficits.

Larry Kosmont, a local real estate and economics consultant who advises local municipalities on fiscal policy, says any economic slowdown will likely hit capital projects first.

“They are not going to fix up that library or add that baseball diamond,” Kosmont said.

Only when the slowdown drags on or turns into a full-blown recession would cities cut back on staff, he said. Police and fire services typically are last to feel the cuts, because they enjoy broad public support.

As for the city of Los Angeles, which had to close a $75 million structural budget deficit for the current fiscal year ending next June 30, both Deputy Controller Lynch and Chief Administrative Officer Keith Comrie said they expect the city budget to ride out a modest slowdown.

“Our revenues are trending slightly ahead of projections in our budget right now,” Comrie said. “We have beefed up the reserve fund, which we hope will handle any problems.”

However, city expenditures especially salaries for city employees are still expected to grow faster than revenues, prompting L.A. Mayor Richard Riordan last week to ask all city departments to trim 2 percent off their budget requests or find other equivalent savings for the 1999-2000 fiscal year.

Lynch said that the robust real estate market should ameliorate the negative impacts of a global economic slowdown.

“There is such demand for housing out there right now,” Lynch said. “Unless we see wholesale layoffs, people are going to keep buying, and that will increase our property-tax revenues.”

Rising property-tax receipts should also help the county weather the storm, according to Adibi. “The county would see less growth in sales taxes and vehicle license fees,” he said. “But that would be more than offset by higher property taxes.”

County Assessor Kenneth P. Hahn said he expected property assessment numbers to be significantly higher next year because of the hot real estate market. Property taxes would increase correspondingly, because they are calculated by taking 1 percent of the total assessed valuation.

However, if the widely anticipated downturn drags on or turns into an actual recession, the county would be hit on both ends: Revenues would decrease and the demand for health and welfare services would increase.

“The county would get a double hit,” Kosmont said.

Getting help from the state would be difficult, because the state would also be hurting for money. In 1993, the state kept $2 billion worth of property taxes originally earmarked for counties and cities to balance its own budget.

Richard Popper, budget deputy to county Supervisor Zev Yaroslavsky, said there would be an additional wrinkle if the predicted slowdown turns into a recession.

“Now that we have welfare reform with preset block grants, we cannot expect additional dollars to come to the county if we get more people eligible for welfare like we did in past downturns,” he said. “In a recession, it is going to be very difficult to move those additional people into the workforce, which means we could face a serious problem in welfare.”