California Braces for Fresh Budget Deficit Turmoil

Friday, November 13, 2009 11:51 AM

SAN FRANCISCO -- California's fiscal watchdog will soon release a report pointing to yet another massive state budget deficit sure to trigger weeks if not months of angst in the state capital of Sacramento.

Governor Arnold Schwarzenegger expects as much as he has repeatedly been snared in heated debates with and among lawmakers over how to balance the state's books. There also are fresh memories of marathon talks that ended in July with a deal to close a shortfall of more than $24 billion.

California's economy has not improved since then and this week Schwarzenegger began airing his own estimate of the budget gap he expects for the remainder of the current fiscal year. He pegs it at $5 billion to $7 billion -- before the $7.4 billion gap his finance advisors had previously forecast for the next fiscal year beginning in July.

Experts say California's combined deficit for the two years will top $15 billion and may swell well beyond that depending on how the state's revenues fare.

So far this fiscal year they have been disappointing and the state of California's economy, which would be the world's eighth largest were the state a country, suggests they will weaken further.

"For July through September we're roughly $1 billion below projection," said H.D. Palmer, Schwarzenegger's spokesman on budget matters at the state's Department of Finance.

LESS WEALTH GOING AROUND

Department staff are keeping a close eye on trends in personal income tax revenues, especially from wealthy taxpayers who provide California with the bulk of those payments, the state's primary revenue source.

California's wealthy have managed to get through the recession in better shape than the less well off -- the state's unemployment rate is in the double-digits -- but there are signs hard times are pinching them too. That suggests fewer of their vital dollars will flow to the state's coffers.

"The economy is not helping," said Steve Zimmermann, managing director at Standard & Poor's, noting a top reason why the rating agency has a negative outlook attached to its A-rating on California's general obligation debt.

In the wake of the financial market turmoils, California's wealthy are not as wealthy as they used to be, and it's showing in their spending -- another concern for state finance staff because sales taxes also are a key money source for the state and signal consumer confidence, or lack of it as luxury clothier Wilkes Bashford's misfortune underscores.

San Francisco's Wilkes Bashford this week emerged as a marquee casualty of the wealthy stashing cash.

A fixture for four decades for the city's sharpest dressers and high-rollers, it is according to court documents filing for bankruptcy protection and selling itself to a private company in response to slumping sales.

CALIFORNIA BUSINESSES STRUGGLING

California's upscale zip-codes are likewise starting to show signs of distress, with foreclosures there on the rise. About one in five foreclosures in California in September struck the top tier of local home values, said Stan Humphries, chief economist at real estate website Zillow.com.

Previously concentrated at the lower end of housing markets, foreclosures are now picking off wealthy households and chipping away at their property values, Humphries added.

Lower home prices there in turn are giving the wealthy pause on spending, including on new and second homes that could give an urgently needed lift to struggling builders.

"In the California market you're actually looking at one to two per week that are closing their doors," said Brian Catalde, president of El Segundo, California-based Paragon Communities.

They have plenty of company.

The Los Angeles, Riverside, San Bernardino and Sacramento areas led the nation in the third quarter in small-business bankruptcy filings, which also rose significantly during the quarter in San Diego, Santa Ana and Anaheim, according to information and data services company Equifax Inc.

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