California’s Revenues Were In The Tank Even Before The Downgrade

dunk tank

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California’s cash revenues fell more than 10% short of expectations last month, bringing the state closer to major spending cuts.A newly released cash report from the California Comptroller John Chiang shows the state took in about $4.7 billion in revenues in July, $538.8 million below 2011 budget projections.

According to the Comptroller, the state took in more personal income tax than expected, but the gains were nearly offset by losses in corporate and sales taxes, as a result of weak consumer spending.

The state faced a $11.1 billion cash deficit as of July 31 that was covered by internal borrowing and a short-term bridge loan, Chiang said in a statement.

Total revenues were actually up $39.9 million from July 2010, but California’s 2011 budget projections assume that revenue gains will be much bigger.

To close California’s $25 billion deficit this year, Gov. Jerry Brown and Democrats relied, in part, on the assumption that revenues would grow by $4 billion — a rosy economic projection that has not panned out in the first two months of the fiscal year.

Spending cuts will be triggered in January if revenues fall below expectations. If revenues are off by more than $1 billion, spending will be slashed by $601 million, including cuts to higher education and childcare. If they are off by more than $2 billion, huge cuts are in store for K-12 education.

The tax collections were reported before the recent market turmoil. Heavy market losses could send California’s economy reeling with further drop-offs in housing and consumer spending. Another stock market slump would put further pressure on revenues — not to mention cost the state’s enormous pension funds billions of dollars — and lead to many more years of belt tightening.

Other states, including Maine and Washington, are now mapping out further spending cuts in the wake of S&P’s downgrade of the federal government’s triple-A credit rating. Ohio Gov. John Kasich told Bloomberg he would also favour spending cuts if revenue slows amid the “chaos” of the debt deal.

Check out the 2011 state budget winners and losers >