State budget shortfall is predicted

SACRAMENTO —  The Legislature’s chief budget analyst warned lawmakers Wednesday that an unexpected dip in tax revenues, along with a number of overly optimistic assumptions in Gov. Arnold Schwarzenegger’s budget, leaves the state facing a much larger fiscal problem than the governor’s spending plan reflects.

Nonpartisan Legislative Analyst Elizabeth G. Hill, to whom lawmakers of both parties look for advice on fiscal matters, urged the Legislature to begin cutting programs now to keep California from plunging too far into the red.

“The state still faces many major risks and pressures,” Hill said at a news conference where she released her analysis of the governor’s budget plan. She projects that about $2 billion in tax revenue the governor’s plan relies on to balance the fiscal 2007-08 budget won’t be there.

The prediction comes after state officials last week reported that quarterly tax receipts plunged in January -- something the analyst’s office attributes to a drop in investment income and the downturn in the housing market. It was the first major state revenue decline in several years. Hill urged lawmakers not to bank on a rebound until 2008, and to start cutting expenditures now.

Democratic leaders were noncommittal. They said that although Hill’s report was a sobering reminder of the state’s precarious finances, lawmakers would have a better idea of how far they need to cut programs or raise taxes after filing season in April, when most Californians will send in their returns.

Officials in the Schwarzenegger administration said that the revenue dip may have been a fluke and that they have yet to see convincing evidence of an economic slowdown.

“The proposal the governor put before the Legislature in January is a roadmap to a balanced budget with no tax increases,” said Department of Finance spokesman H.D. Palmer. “We stand by that plan.” He said the administration remains optimistic that the plan would leave California with a $2.1-billion surplus.

Hill projects that the governor’s budget would, at best, wipe out the state’s reserve and leave California with a $726-million shortfall.

Assembly Budget Committee Vice Chairman Roger Niello (R-Fair Oaks), who is among the Republicans pressuring the governor and Democrats to curb spending, said Hill’s report “should be seen as a wake-up call to get spending under control and reject costly new ongoing programs that will grow the deficit much larger.”

Among the programs Republican lawmakers are resisting is Schwarzenegger’s multibillion-dollar healthcare proposal. The plan would require every Californian to have health insurance, and would place new assessments on small businesses, hospitals and doctors to help the state achieve that goal.

Hill’s report said the healthcare proposal, which she called “an important starting point for discussions on healthcare in California,” could add to the state’s financial problems.

She said the administration’s assurances that the proposal would not strain the budget may be optimistic, pointing to “a number of fiscal risks and uncertainties which could exceed $3.2 billion.”

She said one area that lawmakers could use to keep the budget in balance is school spending. Hill recommended that the Legislature cut aid to schools by $609 million in the current budget year, saying it is unlikely that schools will be able to spend the money by the end of the fiscal year in June.

That idea provoked a sharp rebuke from education groups.

Kevin Gordon, a lobbyist who represents 670 California school districts, said schools need the funds to implement a number of new programs that the Legislature and governor created last year, including expansions of physical education, counseling, music and language offerings.

“Anybody trying to advance a proposal to take funding away from schools after the budget was passed is in for a big fight by the education community,” he said.

But not everything Hill proposed was a cut. She also advised lawmakers against some major reductions championed by the governor. Among them is Schwarzenegger’s plan to take away cash assistance intended for children whose parents are on welfare but fail to meet the program’s work requirements. The move would affect roughly 70,000 children.

The analyst suggested that, as an alternative, the state send caseworkers to meet with parents to try to get them back into the program and to make sure they are not exempt from the work requirements. She proposed only then reducing -- but not eliminating -- cash assistance for children whose parents are supposed to work but fail to do so.

Hill also said the tuition hikes the governor proposed for state university students were too steep. Schwarzenegger called for a 7% student fee increase at the University of California system and a 10% increase at California State University campuses.

Such fee hikes, she said, would leave students shouldering a bigger share of the university budgets than in past years.

Hill said an increase of 2.4% would be more appropriate.

evan.halper@latimes.com

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Money woes

Among the findings of the state nonpartisan legislative analyst’s office:

* The governor’s budget would leave the state with a deficit of $726 million, not the $2.1 billion surplus he projected last month.

* State revenues appear to be dropping sharply, leading to $2 billion less in tax receipts than the administration projected.

* The state economy will grow at a slower pace this year than last year.

* The Legislature allocated too much money for schools this year.

* The governor’s proposed welfare cuts are excessive.

* The governor’s proposed tuition hikes should be reduced.