The California State Budget Crisis

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California faces a $25.4 billion budget deficit over the next 20 months and a solution to this newest crisis is expected to be far more difficult than in years past, the nonpartisan Legislative Analyst's Office said Wednesday, November 10.

Declining revenue and lawmakers' past reliance on one-time budget fixes have contributed to the recurring deficit, Mac Taylor, the legislative analyst, said.

California, Taylor said, has a basic choice: Solve the problem now or pass it to future Californians.

Taylor suggested that the Legislature act quickly and consider both cuts to services and increases in taxes. Lawmakers have refused to raise taxes since February 2009.

"Everything needs to be on the table if we're going to have any chance of closing this in a realistic way," Taylor said. He added that a solution to the problem "is going to be much, much more difficult than last (fiscal) year" due partly to last week's passage of Proposition 22, which prohibits the state from raiding transportation and local government funds - a tactic legislators have relied on to help bridge gaps in the past.

The analyst's pronouncement, which marks the first step in the state's yearly budgeting process, comes just over a month after lawmakers passed a budget a record-breaking 100 days late to solve a $19 billion deficit. That budget had $86.5 billion in general fund spending.

$6 billion less this year

The analyst's new $25 billion deficit estimate includes a $6 billion shortfall from this year, much of that due to federal aid the state counted on but probably will not receive.

Perhaps the most discouraging piece of the report is the projection for spending on public education for K-12 and community colleges. That is determined by the formula approved by voters in Prop. 98. Based on projections of lower revenue largely because of the expiration of temporary tax increases, the analyst assumes education spending would be $2.2 billion lower in 2011-12 than this year. Had the assumption not been made, he would have projected a $27.4 billion deficit.

That means cutting $2.2 billion from this year's level of education spending would do nothing to reduce the $25 billion problem next year.

Some lawmakers called for immediate action. They want a special session of the Legislature in the waning weeks of the administration of Gov. Arnold Schwarzenegger. A spokesman for the governor said that is a possibility.

"We've been talking to legislative leaders about the best course of action," said Schwarzenegger spokesman Aaron McLear. He said the governor believes the state is owed the federal money that the analyst believes won't be forthcoming, adding, "We're going to keep fighting for every dime they owe us."

Evan Westrup, a spokesman for Gov.-elect Jerry Brown, said the Brown team is working closely with Schwarzenegger and that Brown would return to Sacramento next week to focus on the budget.

Assembly Speaker John Pérez, D-Los Angeles, did not make a specific call for immediate action. Instead, in a statement, he said he has had several productive conversations with Brown "on how we can work to find solutions to the deficit," adding that the deficit is closely linked with the unemployment rate. Pérez had said last week the deficit could be as high as $15 billion.

Senate President Pro Tem Darrell Steinberg, D-Sacramento, who said last week he thought the deficit could be as large as $12 billion, said in a statement Wednesday that the "forecast is sobering, but we have been through worse. It's time to shake things up. There is a third way beyond the tired and old debate over state expenditures."

Steinberg reiterated his call to restructure state government to give more control to local entities.

Senate Republican leader Bob Dutton of Rancho Cucamonga (San Bernardino County) wants Schwarzenegger to call a special session as soon as the new Legislature is seated Dec. 6.

"This is clearly a fiscal emergency that needs immediate action. We need to roll up our sleeves and get to work right now, because every day we wait makes matters worse," Dutton said.

Newly elected Assembly Republican Leader Connie Conway of Tulare also called for immediate action and said Republicans would fight for a "no-tax budget."

In last week's election, voters approved Prop. 25 to create a majority-vote threshold to pass a budget, shrinking it from the previous two-thirds requirement, but they also passed other measures that constrain the Legislature's ability to tap local funds and raise fees to balance the budget.

The local fund measure, Prop. 22, created an $800 million hole in the current budget, according to the budget analyst.

The analyst's office recommends that lawmakers take a multi-year approach to the deficit, starting with $10 billion in permanent cuts and revenue and $15 billion in one-time solutions during the next 20 months. Over the next three years, the analyst recommends finding about $3 billion in permanent solutions each year. Taking those steps would eliminate California's deficit by 2015, Taylor said.

"We think it is going to take time. The problem is just too large," he said.

At a news conference, Taylor added that potential areas where the state could raise revenue include continuing reduced tax credits for dependents and the temporary increase in the vehicle license fee.

One of the biggest reasons for the deficit is the expiration in 2011-12 of temporary tax increases enacted as part of a February 2009 budget deal to close a $42 billion deficit. The reduction in those taxes, including the sales tax, personal income tax and vehicle fee, will mean the state will receive about $8 billion less.

E-mail Wyatt Buchanan at wbuchanan@sfchronicle.com.

Thursday, November 11, 2010