http://www.mercurynews.com/mld/mercuryn ... source=rss

LEGISLATIVE ANALYST SAYS TAX REVENUE GROWTH WON'T COVER SHORTFALL

SACRAMENTO - Foreshadowing a politically difficult budget season, Gov. Arnold Schwarzenegger next year faces a growing $5.5 billion shortfall that cannot be papered over with increased tax receipts alone, the state's independent financial analyst reported Wednesday.

That's bound to cramp the governor's second-term efforts to expand health care coverage to perhaps 3 million Californians and revamp the state's abysmal prison system.

Elizabeth Hill, the non-partisan legislative analyst who provides budget advice to state decision-makers, is projecting a $5.5 billion deficit for the 2007-2008 budget year that begins July 1 and a roughly $5 billion gap in the following year.

Just over half of that can be erased by a continued gusher of tax revenues which have been rising because of economic growth, leaving the state with a $3.1 billion balance this year. However, the slumping housing market will likely slacken the state's income, Hill warns.

``It may be tempting for the state to rely heavily'' on the large reserve and other short-term fixes to get through the next year, she said. ``At this advanced stage of the current economic expansion, California should be running projected budget surpluses instead of deficits, particularly in light of the risks posed by the current real estate downturn.''

Schwarzenegger this week expressed optimism that economic growth triggered by the passage of $37 billion in public works bonds will keep the economy humming.

``There will so much construction activities going on that where the private sector will fall off, the public sector will pick up,'' he said at a Los Angeles forum Tuesday. ``Economic prosperity and stimulating the economy solves a lot of those problems, so you don't have to schvitz a whole year long about the revenues, so you can go out and just say, `Let's stimulate the economy and then we'll have the revenues.' ''

Lawmakers and the governor, who once styled himself as the state's ``collectinator,'' may also be optimistic that the Democratic takeover of Congress could lead to more federal funding for repair of storm-vulnerable levees and for the incarceration of illegal immigrants.

California has long been what's called a donor state: For every dollar it sends to Washington, it receives roughly 78 cents back in services.

Last year, an unforeseen windfall from home sales and the exercise of Google stock options allowed Schwarzenegger to pave his path toward re-election. He and lawmakers were able to grow spending in almost every budget area, especially for education -- thus defusing some of the governor's most powerful critics.