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Schwarzenegger’s $20 Billion Deficit Projection Doesn’t Add Up Yet

Governor Schwarzenegger set off a fury in Sacramento Monday when he said the state's budget deficit could balloon to $20-billion next year. That's a lot bigger than the deficit projected back in January.  A big scary deficit could strengthen the case the Governor's been making for budget reform. But KPCC's Julie Small reports Sacramento's professional number crunchers say it's a bit too early to say the Governor's math will come true.

To explain Governor Schwarzenegger's $20-billion deficit projection, the Finance department's HD Palmer does what any good math teacher would do. He pulls out some paper - and he sketches out a word problem. 

Palmer: We started in January. We estimated the problem we had to close was about $14 billion.

So the Legislature went to work, cutting programs and departments here and there. The state government's $14-billion deficit in January was down to $7.4 billion a few weeks later. Then, says Palmer . .

Palmer: The Governor posited the possibility that that problem, that we have now could be conceivably be $10 billion larger -- we don't know it for now -- but it's potential. Under a worst-case scenario, it could grow that much.   :07

"Worse case scenario" … like a continuing economic downturn tied to the housing slump and credit crunch. So the Legislature trimmed the deficit to $7.4-billion … a "worst case scenario" - which could happen - adds $10-billion. But wait -- that puts the deficit at about 17-and-a-half-billion. 

How did the Governor get from there to $20-billion in the red? It turns out $3-billion of the Governor's budget deficit projection isn't a deficit at all. It's the amount of money the Governor wants to reserve as cushion in the next budget. That’s how he came up with a $20-billion shortfall. And now that you know all that, HD Palmer says -don't get too attached to that number.

Palmer: The one important thing about this number or any other number is that they are all going to be in the rear view mirror very soon, because we are in the process right now of updating our revenue forecasts, updating our economic forecasts and looking at different changes in state programs and how they affect the budget.

Don't just take the Finance Department's word for it. Michael Cohen with the Legislative Analyst's Office says April's the wrong time to make any budget projections.

Michael Cohen: The Franchise Tax Board - which collects our income tax revenues - is still in the process of opening up those income tax receipts to see how much the state received in April. And then …

And then, Cohen says, his office takes those tallies and sprinkles in some economic indicators to brew up a budget forecast.

Cohen: Two of the most important economic factors this year are the housing market combined with how we think energy prices are going to be doing, gas prices being one the key factors there. 

That math problem takes a couple of weeks to work out. And that’s why the Governor of California waits until the middle of May before he formally releases his revised budget proposal. Until then, even Arnold Schwarzenegger's budget projection is just a math problem on a big piece of scratch paper.

In Sacramento, I'm Julie Small.

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