Last May, Gov. Arnold Schwarzenegger's fiscal office issued this appraisal of the state's economy as he unveiled a revised state budget proposal:
"The struggling housing sector will continue to weigh on the state and national economies in the next two years, but economic growth should begin to improve late this year or in the first half of 2009."
Well, as they say in New Jersey, fuhgeddaboudit.
It's already "late this year" and not only is the economy not improving, it's getting worse, with hundreds of thousands of jobs wiped out, unemployment spiking well above expectations and retail sales in decline.
Yet the budget that Schwarzenegger signed last week is based on revenue estimates derived from that upbeat May forecast. It continues the long-standing, inexplicable practice of not making economic and revenue revisions while the budget is still pending, even if the numbers are old and wrong.
By happenstance, as Schwarzenegger signed the budget, three university-based economic think tanks issued gloomy pictures of the state's faltering economy.
"We can expect doldrums to be the operative word describing the California economy over the next 18 to 24 months," the latest UCLA Anderson Forecast, declares.
"The state economy has been virtually stalled since late 2007, and is unlikely to record significant growth until the summer of 2009," the University of the Pacific's Business Forecasting Center says.
And, rounding out the troika, the Economic Forecast Project at the University of California, Santa Barbara, paints a "dismal picture of a state economy that is performing far worse than the United States economy," with negative economic and job numbers in 2008 and 2009.
The Capitol's irrational custom of not updating economic and revenue forecasts contributes to its sorry record on matching income and outgo because state revenues have become much more volatile as they have become much more dependent on personal income taxes.
Income taxes are 50-plus percent of revenues and very sensitive to even minor economic changes, both up and down. There's a historic tendency in state government to under-adjust for both upturns and down cycles in the economy, exacerbated by the revenue stream's increasing volatility.
That's a major reason why we see unanticipated windfalls of income taxes in some years and big declines in others, generating lust for spending and tax cuts in the up years, and panic in the down years, such as this one.
Simple politics explain the refusal to adjust. It's always very difficult to write a budget that can win two-thirds of legislative votes, but especially when deficits loom. Downward revenue forecasts would widen projected deficits and raise the political hurdle, so by common consent, everyone pretends that outdated numbers are still valid – in effect punting the problem into the next year.
Or, as they say in Silicon Valley, garbage in, garbage out.
Call The Bee's Dan Walters, (916) 321-1195. Back columns, www.sacbee.com/walters.
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