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Federal budget standoff could hurt California economy

Failure to avoid the 'fiscal cliff' could delay the state's recovery and cost it $11 billion in tax revenue. Funds to hire police officers and affordable housing money could be victims as well.

November 23, 2012|By Chris Megerian, Los Angeles Times
  • Job seekers fill out applications during a job fair in Concord, Calif., this month. The state's unemployment rate has remained in the double digits.
Job seekers fill out applications during a job fair in Concord, Calif.,… (David Paul Morris, Bloomberg )

SACRAMENTO — Just as California's finances seem to be getting back on track, experts warn that the federal budget standoff could delay the state's economic recovery and cost it $11 billion in tax revenues.

If President Obama and Congress fail to reach a deal by the end of the year, the resulting tax hikes and spending cuts could send the country into another recession. California tax revenues could lag nearly 6% over the next year and a half, according to the state Legislative Analyst's Office, nearly wiping out any gains from Proposition 30, the tax-hike plan pushed by Gov. Jerry Brown and approved by voters this month.

California also would receive less federal funding, and the state could end up wrestling with more deficits at a time when the nonpartisan analyst had forecast surpluses.

"This would be a bad turn of events," said Jerry Nickelsburg, senior economist at the UCLA Anderson School of Management. "It would delay the recovery in California."

And the consequences would reverberate throughout the state, from Sacramento down to local parks and police departments.

On the federal chopping block are Justice Department grants that help hire police officers. So is funding from the Department of Housing and Urban Development for community programs and affordable housing.

"With all the other cuts that we're making, it's something we're definitely going to feel," said Jennifer Whiting, a lobbyist with the League of California Cities.

In the last year, $24.4 million in federal money was used to hire 119 police officers in California, including 25 in Los Angeles.

Local governments also received $482.6 million for community development and affordable housing. Glendale, for example, used its grants for after-school programs, increasing energy efficiency and renovating a park with a basketball court and picnic area.

If the country goes over the "fiscal cliff," $1.2 trillion could be cut from the federal budget over the next nine years, according to a September report from Obama's Office of Management and Budget. About half of that money is defense spending, some of which flows to contractors in California. The Aerospace Industries Assn. has projected that the federal trigger cuts could cost California 126,000 jobs.

But California is less at risk than some other states because it doesn't rely as much on defense spending and federal funds that could get sliced next year, according to the Pew Center on the States. The bigger concern, analysts said, is the potential for an economic downturn.

The country could slide into a new recession in the first half of next year if the federal budget situation isn't resolved.

In California, where unemployment has remained in the double digits, more jobs would be lost. At the same time, a typical four-person family in the state could see its tax bill increase by more than $3,200, according to the Tax Foundation in Washington, D.C.

Democratic and Republican leaders have said they expect to reach a deal to avert the crisis. The primary sticking point has been taxes on the wealthy. Obama wants to allow some of the tax cuts originally signed by President George W. Bush to expire, while Republicans have been hostile to the idea.

Christopher Thornberg of Beacon Economics, a financial consulting firm in Los Angeles, said the debate over the fiscal cliff had become overwrought.

"Would it cause a recession? Sure," he said. "But I bet it would be a mild one."

Even so, California budget estimates already have proved too optimistic this year. Tax revenue has fallen slightly short of expectations, and the state has saved much less than it had hoped to from the closing of local redevelopment agencies.

"We're just barely keeping our heads above water," said Gabriel Petek, who tracks California finances for Standard & Poor's.

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