Budget cuts will sap power of stimulus

SACRAMENTO - Tens of billions of dollars are cascading into California from the federal stimulus, but the oomph is being weakened by massive cuts in state spending.

The financial crosscurrents show up in places such as downtown Sacramento's old railyard, now undergoing a huge face-lift. Stimulus money from Washington, D.C., will help move the train tracks, a key element of the plan. Separately, though, the slashing of redevelopment funding by the Legislature might derail a housing project at the site.

This push-pull effect will play out in education, transportation and other sectors across the state. Economists say the likely result will be prolonged pain and a weaker recovery despite the $85 billion coming to California from the stimulus over the next two years or so. Unemployment is 11.6 percent statewide, and is forecast to top 13 percent next year. The jobless rate in Stanislaus County was 16.6 percent in June.

The state budget "absolutely will blunt the impact of the stimulus," said Chris Thornberg, head of Beacon Economics consulting in Los Angeles.

Thornberg and others say the budget agreement, which will cut billions in spending on transportation, social serv-ices and other programs, is only part of the equation.

A proper accounting of the drag on California must include the February budget agreement, which carved nearly $30 billion out of the economy, and fresh spending cuts sure to come when tax revenue lags next year.

Draining the dollars

The new state budget, designed to erase a $26 billion deficit, will take a lot of money out of circulation, including $9 billion from education and $1.7 billion from local redevelopment budgets. A total of $15 billion in spending will disappear, with the rest of the deficit being whittled by borrowing, asset sales and deferral of expenditures.

The state is removing billions from higher education "at exactly the time people are unemployed, and it's a good time to go back (to school) and get skills," said Stephen Levy of Palo Alto's Center for Continuing Study of the California Economy.

While higher education is getting cut, hundreds of millions in federal money is coming to help unemployed Californians with their careers.

That's just a sliver of the stimulus pie. For Californians, the stimulus plan means about $30 billion in lower taxes and at least $2 billion in extra Social Security, disability and unemployment benefits. Some $4.7 billion will be spent on transportation projects and $3 billion on energy.

But economists say the impact of the stimulus must be weighed against the cumulative effect of state budget deals past, present and future.

In February, the Legislature approved a plan to cut spending and raise taxes by a combined $27 billion over two years.

What's more, experts say it's extremely likely that the Legislature will be wrestling with more deficits next year.

Next year: Not pretty

"We're going to be right back to a ($20 billion to) $25 billion deficit next year," Thornberg said.

Levy agreed that more budget pain is a near certainty.

"Our income is down, our tax (revenues) are down," he said. "Our public spending is down and going to stay down for a while."