Budget plan could hit capital region hard

Any way you slice it, the new state budget probably won't be kind to the already sluggish economies of California and Sacramento.

Make deep cuts in spending, as Gov. Arnold Schwarzenegger urged in his budget proposal, and you take money out of the economy. Raise taxes, as Democrats believe is necessary, and you create the same effect.

"No matter what you do, you're in a heap of trouble," said Los Angeles economic consultant Chris Thornberg.

And the governor's proposed 2008-09 budget could be especially troubling for greater Sacramento.

Although he's calling for billions in new bonds for infrastructure projects, his short-term budget plan assumes a 10 percent cut in state spending and the elimination of 6,800 jobs in the upcoming fiscal year. The cuts will be spread statewide, but the pain might feel worse to Sacramentans than to other Californians.

That's because state hiring has effectively propped up the area's economy lately. In the past year, state hiring in Sacramento – totaling 4,300 jobs – has accounted for two-thirds of the region's new jobs, blunting the impact of cutbacks in construction, real estate and mortgage lending. Remove the state as a major source of hiring, and the region's economy – already in tough shape – could worsen.

More potential trouble looms. Schwarzenegger's budget, aimed at defeating an estimated $14.5 billion deficit, assumes a roughly 2 percent increase in tax revenue in the upcoming fiscal year – a target that may prove overly ambitious as the economy slows.

"The challenges may be bigger than they envision," said Steve Sheffrin, an economist and budget expert at the University of California, Davis. Thornberg, head of Beacon Economics, went further. Schwarzenegger's "estimates of financial flows for the next fiscal year are grossly overstated," he said.

But Stephen Levy, director of the Center for Continuing Study of the California Economy, said the revenue forecasts "are not out of line."

By almost any measure, the state's economy has been weakened by the housing slump. Unemployment has risen nine-tenths of a percentage point in the past year, to 5.6 percent. Total job growth statewide in November, the latest figures available, was an anemic 900 jobs.

The governor's budget report says personal income, one of the major benchmarks of economic health, "has held up surprisingly well" despite the housing crunch. "Economic growth should start to pick up in late 2008," the report adds.

But the report also acknowledged that some aspects of the economy are clearly faltering. Taxable sales went up less than 1 percent in the first three quarters of 2007. And Schwarzenegger, along with most Republicans, believes higher taxes would harm the business climate and discourage economic growth.

"I do not believe in tax increases," the governor said Thursday. Instead, he is proposing billions in cuts, including reduced aid to schools, the closure of 48 state parks and beaches, lower Medi-Cal spending and the early release of some prisoners.

Sheffrin said either choice facing the governor – raise taxes or cut spending – would have roughly the same painful impact on the state's economy. But Levy said Schwarzenegger's proposal is worse because California needs to spend more to make the state attractive to businesses.

"California needs to be investing more, not less, in our people, our infrastructure and our communities," Levy said.

Schwarzenegger did propose $28 billion in new bonds to pay for public school construction, water projects and other facilities. And a $37 billion infrastructure bond approved in 2006 means money will flow for transportation and other programs in coming years.

"He understands the need to invest in the future," said Denise Davis, a spokeswoman for the California Chamber of Commerce. She said the chamber was "very pleased" that the governor resisted higher taxes.

The state's latest budget deficit hasn't reached the crisis stage of 2003, when the shortfall approached $40 billion and angry voters replaced Gray Davis with Schwarzenegger. That's especially good news for economic development people, who struggled to "sell" California to site-relocation consultants.

"There were people who were referring to this as a circus," said Barbara Hayes, executive director of the Sacramento Area Commerce and Trade Organization. "It was hard to defend against that."

She said Sacramento's economy remains viable even though unemployment has risen to 5.6 percent, the housing market remains weak and the budget problems will likely curb state hiring.

Cutbacks in state government won't help, though, as when the state abandoned a $520 million office project in Sacramento in November.

The weak housing market is Sacramento's No. 1 problem, but the state's problems "will exacerbate that," said Dean Wehrli, a vice president with Sullivan Group Real Estate Advisors in Elk Grove. "It's obviously going to affect job growth."

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