SACRAMENTO -- Amid growing fears of a double-dip recession -- punctuated by the stock market's harrowing plunge -- Gov. Jerry Brown's bet on a $4 billion tax surge to bolster the state's coffers is looking illusory at best, economists say.

And that means in a matter of months California's students, as well as poor and disabled residents, could be paying big-time for the state's gamble on a rebounding economy. Without a bull market pumping out a generous batch of capital gains, Californians can expect another round of severe budget cuts in January.
Brown's "revenue projections were silly before," said Chris Thornberg, founding principal at Beacon Economics, a Los Angeles consulting group. "It was always unrealistic, and now it's just that much less realistic."

Brown and Democratic legislative leaders produced a rare on-time $89 billion budget in June, but one that relied on the hope that wealthy individuals would continue their months-long capital-gains spree that generated billions of dollars in unexpected revenues earlier this year.

Capital gains taxes have been notoriously volatile over the years -- a phenomenon that has been a recurring headache to state finance officials.

Yet Brown and his finance team had reason to feel confident: The state's economy had shown signs of recovery with $6.6 billion in unexpected tax receipts in May, and another $1.2 billion in June. But investors have lost $1 trillion in the market plunge since late July, so the well may now be dry, economists say.


It appears the state's economy "will be slower in the months ahead than it appeared a couple of months ago," said Stephen Levy, director and senior economist of the Center for Continuing Study of the California Economy in Palo Alto. So the state is "unlikely to get an extra $4 billion in revenues from general growth."

Early this week, Controller John Chiang will announce the state's cash receipts from July. In June, the state received $80 million less than it expected, according to H.D. Palmer, a spokesman for the Department of Finance.

If a team of economic experts assembled by Finance Director Ana Matosantos determines later this year that economic indicators are down, up to $2.5 billion in spending cuts would be automatically triggered, forcing hard choices that Brown and Democrats were hoping to avoid.

Higher education, corrections and safety-net programs would have to absorb more reductions than they already have. The biggest of the cuts, about $1.5 billion to schools, would happen if the revenues are short by $2 billion or more.

School districts would have the option of shortening the school calendar by up to seven days, down to 168. Only as recently as a year ago, schools were required to hold classes 180 days.

"What I think hurts the most is this is giving a message to our kids that life is pretty hopeless," said Steve Stavis, just-retired superintendent of the Santa Clara Unified School District.

He said he agreed with Thornberg that the Brown administration's projections were "silly."

"It was just buying time to get out of the moment without thinking about the future," Stavis said.
Social service agencies are also bracing for more slashing, at a time when historic cuts to social programs made earlier in the year are just taking effect.

For those still receiving aid through the state's welfare-to-work program, CalWORKS, grants were cut 8 percent last month. In Santa Clara County, that means more reliance on food banks and homeless shelters for 37,602 residents, including 29,066 children.

But Palmer, the Department of Finance spokesman, insisted it's far too early to judge whether the state will have to pull the trigger on cuts.

"We've got four more months worth of economic data to come through the door," Palmer said. "You can't take one day of the stock market and extrapolate how that translates into revenues."

A decline in the stock market, of course, is only one of many economic and fiscal factors that could affect California.

Persistent double-digit unemployment, sluggish housing prices and anemic job growth are at the center of California's weak economy, said Jed Kolko, economist for the Public Policy Institute of California. And that's likely to keep income and sales tax revenues low, he said.

In addition, Friday's Standard & Poor's downgrading of the U.S. government's AAA rating could lead to increases in borrowing costs for local and state government -- which could mean even more significant budget cuts. And the $917 billion in federal budget cuts that Congress agreed to last week will also "cut into California's budget," Kolko said.

A ray of hope lies in Silicon Valley, where the high-tech and information sectors are roaring back to life. Google, Apple and Facebook are showing strong profits, which have already led to higher salaries, with bonuses and stock options to come.

If employees of those companies "want to buy homes, cars, something with the wealth they had to work so hard for, they have to sell those stock options," Levy said. "And if they do that, they've got to pay taxes. It's just a matter of whether large bonuses are paid in December.

"That would be where the revenues Brown so desperately needs would come from,'' Levy said. "If it comes, the $4 billion in added revenue the governor hopes for will come almost entirely from this one sector of the economy."