California's Budget Impasse Continues as Recession Woes Show Little Sign of Easing

AS Gov. Pete Wilson (R) and the California Legislature remain deadlocked over how to trim $10.7 billion from the state budget - now 20 days overdue - economists and politicians alike are increasingly concerned about the signals of growing economic instability being projected out of state.

"No state in the US has had to deal with what's been put on our plate," says Jack Kyser, chief economist for the Los Angeles Economic Development Corporation. Citing recent earthquakes, riots, defense layoffs, and construction downturns, Mr. Kyser says communities statewide are hunkering down for still more government layoffs and recession, with no end in sight.

The state is already reeling from the longest, deepest downturn since World War II. Starting in mid-1990, California has lost between 500,000 and 700,000 nonfarm jobs, about 85 percent in the southern part of the state. State unemployment has been running significantly higher than the US rate, hitting 9.5 percent compared with the nation's eight-year-high of 7.8 percent at the end of June.

Besides issuing controversial IOUs to pay its workers since July 1 - 15,297 at last count, valued at $507 million - the state lost its triple-A bond rating, signaling investor uneasiness and making it more costly for California to borrow. "The state is giving itself one black eye after another," says Joe Wahed, senior economist for Wells Fargo Bank.

Still unknown is just where the budget ax will fall, though Democrats and Republicans alike predict steep cuts in welfare grants (4.5 percent), state university salaries (4.7 percent), higher student fees, and loss of subsidies to local police, fire, and other services. Governor Wilson wants 15.3 percent taken away from health and welfare spending and is currently embroiled in controversy over a proposal that would block 110,000 kindergartners from entering school this fall.

"People feel the state is without leadership during this budget wrangling, and it is disturbing to them," Kyser says.

Reeling from criticism over last year's budget, when he joined Democrats to raise taxes by $7 billion, Wilson is sticking by his guns this year. "We offered a plan that balanced the budget without raising taxes and without adopting Congress's disastrous policy of deficit spending," he says.

But the Wilson administration is also coming under fire from some economists for taking aim at programs during a "recession deficit" - the shortfall of about $10.7 billion in revenue that is projected to shortchange the state's $58 million budget.

"Both the Legislature and governor should accept the fact that you don't make long-term structural changes during a recession," says Robert Arnold, senior economist for the Palo Alto-based Center for the Continuing Study of the California Economy (CCSCE). "You borrow for the present and pay back when the state recovers."

ACCORDING to most observers, that will not be soon. David Hensley, project director for the UCLA Business Forecasting Unit, notes in his June quarterly report that the California economy is at best flat, at worst, "in a gentle-but-steady decline....

"While the halting recovery continues nationally ... there is nothing we can point to in the recent evidence to suggest that local recovery is imminent." The state continues to lose jobs each month, he says, and building-permit data show no improvement in housing starts - a key fiscal indicator. Taxable sales also fell at a 7 percent annual rate last quarter.

Though several economists had hoped that tourism and home-building would be bright spots in leading the state into recovery, recent earthquakes and riots have put those industries in a holding pattern.

"Everybody that has been thinking about coming to California to live or work is now considering earthquakes and civil unrest as a deterrent," Kyser says.

As state economists gather in legislative and informal session, one bone of contention continues to be California's high-tax regulatory environment, which some claim is causing industry to flee to other states. But CCSCE's Mr. Arnold holds that no evidence exists to support that impression. He cites a recent Los Angeles Times survey of the economic development departments of 25 states showing relocation of California firms to be "an insignificant trickle."

Kyser says the Los Angeles EDC has tracked the loss of 200 firms since 1989. Over the weekend in Anaheim, 250 representatives from 28 states wooed state industry leaders in a three-day convention designed to underline California's stringent air-quality standards, workmen's compensation costs, and crumbling government services.

But economists agree the weakened US economy has been perhaps the major factor in California's downturn and that a national recovery will aid one here.

"California's diversified economy ties it to what's happening elsewhere," Arnold says. Noting that the US recovery is the weakest in postwar history, he adds, "half of our problem is from out of state."