DEFICIT—Power Crisis Not Only Culprit

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Much has been written in recent months about the rapid evaporation of what was once a projected $10 billion state budget surplus, with the primary culprit being identified as the energy crisis.

But there is another, possibly bigger culprit: the slowing economy.

While, the energy crisis is causing state expenditures to soar, the economic slowdown is leading to a steep drop-off in state tax revenues.

Fully one-fifth of the state’s revenues in the last couple years have come from capital gains taxes on stock sales and income tax on the exercise of stock options. But those sources of revenue are kaput with the Wall Street meltdown. Meanwhile, mounting layoffs, dot-com closures and the likely Hollywood strike are expected to severely restrict income tax revenues.

“It’s really a crunch we’re seeing here,” said Tom Lieser, senior economist at the UCLA Anderson School. “You’ve got an increase in claims in the form of energy expenditures coming at the same time the resources are diminishing.”

That crunch is not expected to hit immediately, however. Tax receipts for the 2000 calendar year, due April 16, are tracking pretty close to projections, despite the nine-month slide in the Nasdaq and the pricking of the dot-com bubble. That’s because many Californians exercised their stock options or sold shares at a handsome profit shortly after the market began its tumble. What’s more, the bulk of the layoffs and closures had yet to sweep through dot-com land until this year.

“We had forecasted that revenues would increase by about $5 billion, or 6.9 percent, and it looks like it’s coming in pretty close to that,” said Patricia Landingham, a budget analyst with the state Department of Finance.

Of course, that’s a long way from the huge $13.3 billion increase (22.7 percent) in 1999 revenues over 1998. But some of that increase was from the first installments of tobacco settlement dollars that arrived into state coffers.

The real trouble isn’t expected to show up until tax receipts come in next April for the 2001 calendar year. For one thing, unless there is a sudden and dramatic turnaround in stock prices, far fewer people are expected to exercise stock options this year if they still have them. And a complete flip is expected in the sale of stock. Rather than state coffers reaping capital gains, the coffers will likely dip as people sell stock at a loss and use that loss to offset other income.

The revenue picture may darken even further as layoffs multiply and fewer people are left to pay state income taxes. Thousands have already been laid off in the high-tech sector and large companies have trimmed their workforces to maintain profitability. The prospect of Hollywood labor strikes and rolling blackouts this summer can only serve to amplify this.

“We’re certainly looking at a situation in 2001-02 that looks gloomier than it did in January or February,” said Brad Williams, senior economist with the state Legislative Analyst Office.

And that’s just on the revenue side. The expenditure picture is just as gloomy and murky. Since January, the state Department of Water Resources has spent $4 billion to purchase electricity, at a rate of $50 million each day. And there’s no end in sight to the purchases.

The Legislature in February approved the sale of $10 billion in bonds to refill state coffers, and those bonds are expected to be sold in late May or June. However, there is growing doubt that the $10 billion bond sale will cover the cost of power purchases going forward; and there is still no agreement on how to cover the debts of Southern California Edison and Pacific Gas & Electric, now put at $14 billion. Gov. Gray Davis’ plan to buy the utilities’ transmission grid for some $10 billion has stalled out and is being viewed with increasing skepticism.

Many in the state capital privately say that there’s a limit to how much the state can tap the bond market without its credit rating being lowered. They say the state’s general fund will ultimately have to be tapped to cover some of these costs. But no one knows just how much or for how long.

“There’s so much uncertainty out there, it’s really impossible to say just how it’s going to impact the state budget, and that’s what makes it all so frustrating,” one legislative staffer said.

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