California has already fallen behind the revenue hopes that Gov. Jerry Brown and lawmakers used to solve the budget deficit in June, raising fears Tuesday that deeper education cuts may be in the state's future.
Controller John Chiang said for the first month of the new fiscal year, California missed its $5.2 billion July general fund revenue target by $538.8 million, or 10.3 percent.
To help bridge the deficit in the face of Republican tax opposition, Democrats relied on an optimistic assumption that California would receive $4 billion more than previously forecast through June 2012.
Under the budget agreement, if revenues fall short, California will ask districts to shorten the K-12 school year by up to seven more days, as well as impose a fee hike at community colleges. Other cuts would hit public safety, universities and social services.
"While we hope for better news in the months ahead, every drop in revenues puts us closer to the drastic trigger cuts that could be imposed next year," Chiang said in a statement.
The Department of Finance has until December to determine whether the state is on track to hit its revenue target. Brown officials cautioned Tuesday that it is too early to judge whether that money will come in.
"A lot of things still have to happen that are going to have a far greater impact relative to what happens to the trigger," said Department of Finance spokesman H.D. Palmer. "The biggest is when we revise our economic and revenue forecast in the fall."
The Department of Finance will release its own revenue totals in the coming days. Palmer indicated that the department's sales tax data are more positive than the controller's.
But some school officials are already anxious. Compared with Brown's first budget in January, the June document relied on $11.8 billion in additional revenues over 18 months, without the benefit of higher taxes. The state banked some of that money this spring but fell short of the optimistic path in June and July.
"You would have had to be foolhardy to think we'd float our way out of this whole thing just on the economy," said Bob Blattner, a veteran schools lobbyist. "We should have smelled something."
In nearly six weeks since Brown signed the budget, the Dow Jones industrial average has fallen 1,174 points, or 9.5 percent. Jeffrey Michael, director of the Business Forecasting Center at the University of the Pacific, said many forecasters are revising their growth expectations downward.
State officials predicated higher revenues on gains by upper-income earners. But with the market struggling, budget analysts are concerned that those gains have evaporated. The impact may not reveal itself until September at the earliest because of when quarterly filers report their estimated tax liability.
Jason Sisney, who tracks revenues for the Legislative Analyst's Office, agreed with Finance Department officials that it remains too early to judge whether the trigger cuts will be necessary. But, he said, "The odds are definitely tougher than they were a few weeks ago. A significant part of our revenues are correlated with the performance of the market. Such a large turn in the market is clearly not helpful to the state's revenue situation."
Chiang's data said the state received $538.8 million less in July than the $5.2 billion that budget writers projected for the month. Corporate and sales taxes lagged expectations, while personal income taxes were slightly above projections.
The biggest factor was a $419 million gap from an "other" category, which includes an undesignated $229 million July share of the $4 billion tax windfall that state officials had hoped for.
Typical fiscal forecasts assign targets for each revenue source. But when lawmakers and Brown reached their budget deal in June, they did not assign the $4 billion to any particular categories. They based it not on a new economic analysis, but on the fact that cash revenues were higher in May and June than expected.
Scott Lay, president and CEO of the Community College League of California, said he will recommend to his districts that they assume California never receives that $4 billion.
Under current law, that means the state would cut $102 million from community colleges across the state. It also means colleges would impose a $10 per unit fee increase for the spring semester, on top of a $10 per unit increase already in place this fall.
Lay said he is working with legislators to delay the fee increase until next summer, asking districts to shoulder the $30 million cut in other ways. He said it would be a logistical nightmare to ask students for more money after they have already enrolled in spring classes.
Among school advocates, there is a growing sense that lawmakers will face pressure to avoid K-12 cuts even if the revenues fall short. That could mean finding alternative cuts in January before K-12 reductions hit districts in February.
It could also mean finding other sources of revenue. That may include seeking GOP support for taxes or revisiting some of the controversial solutions in the Democrats' original plan, such as selling state office buildings.