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California Faces Huge Budget Gap

With a sluggish economy across the United States, nearly all U.S. states are facing budget deficits. But no state faces a budget gap as large as California's. Its shortfall is projected at $35 billion. A nonpartisan state analyst says California's leaders face hard choices.

Elizabeth Hill is the California legislative analyst and it is her job to examine potential legislation for its economic impact. Her advice is sometimes considered unwelcome by both major parties.

She notes that California has an economy larger than that of most nations. In 2001, for example, the state's output exceeded $1.3 trillion, behind the United States as a whole, as well as Japan, Germany and Britain, but ahead of France, Italy and China.

The projected deficit amounts to nearly half of the state's general revenues and the analyst says that even draconian spending cuts - which no one is contemplating - would not solve the problem. "If we no longer put any general fund money into Medicaid, which is the state and federal program for low-income folks providing health insurance, close the nine campuses of the University of California, close the 23 campuses of the California state university system, and let all of our adult felons go, we would not close this budget," Ms. Hill said.

California's difficulties stem from the high tech bubble of the late 1990s, when incomes soared in the high tech sector and the state earned $17 billion in a single year, 2000, from taxes the state's richest people paid on their capital gains and stock options.

With the crash of the bubble in 2001, state income plunged.

Republicans want to close the gap through spending cuts alone, refusing to raise taxes. Democrats, on the other hand, refuse to make deep cuts in programs like health care, education and social services. The legislative analyst has said that given the size of the problem, both cuts and higher taxes may be needed.

In January, California's Democratic governor, Gray Davis, put forward a budget proposal that satisfied neither party, and it is still being debated. The plan involves both tax hikes and cuts in services, as well as borrowing, and shifting some of the state's financial responsibilities to local communities.

In the long term, the legislative analyst says that unless there are changes in the way the state operates, the deficit will continue year after year. Even with changes, she cautions, there remain many uncertainties, or "wild cards," in the state's future. "And the largest wild card, frankly, is the course of not only the national economy but California's economy," she said. "My office's estimates are that the economy in California will start to turn in the second half of 2003."

The governor's office foresees no improvement in the state's economy until 2004, however.

In any case, California's budget problems must be tackled before then. The state constitution effectively requires a balanced budget by strictly limiting government indebtedness.

This week, state legislators agreed on $3.6 billion in spending cuts, deferred payments and borrowing. That's the good news, says a Republican leader in the California senate. The bad news: State leaders must still close a budget gap of $30 billion.