THE STATE BUDGET : Layoffs, Cuts in Services Could Worsen the Recession

The state’s new austerity budget ends one crisis but could prolong another: Potential layoffs and drastic cuts in services could worsen California’s lingering recession and delay a recovery, economists and business leaders said.

“The good news is, we got a budget,” said Ray Remy, president of the Los Angeles Area Chamber of Commerce. “The bad news is, we got a budget.”

In the short term, the new $57.4-billion budget will probably result in layoffs or salary cuts for state and local government employees, $500 million in new fees, and curtailed welfare and other benefits to residents--all of which could dampen consumer spending and hurt any recovery.

“These cuts are going to ripple through the economy, and they’re pretty Draconian,” said Jeff Chapman, director of the Sacramento Center of USC’s School of Public Administration.

David G. Hensley, director of UCLA’s Business Forecasting Project, predicts that the state’s recovery from its worst economic downturn since the Great Depression will now be delayed until at least next summer.

On the plus side, the new budget signals a willingness to make hard decisions to deal with ongoing fiscal troubles in a state that once bragged of having the world’s seventh-largest economy and only five years ago enjoyed a huge budget surplus.

In the long term, however, cuts in education, services and spending for street improvements, bridge maintenance and other infrastructure--the most drastic in the state’s history--could hurt the state’s ability to retain or attract businesses. This may reinforce the impression that the state does not care about its economic health in the 1990s and beyond, economists said.

“I think they’ve just enacted a bipartisan mistake,” said Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto. “A consensus (of economists) favors increased investment in education and transportation infrastructure as conditions for a successful California economy in the 1990s, and this budget goes in the other direction.”

The budget stalemate already had dealt a serious blow to the state’s economic reputation at a time when the economy was being pummeled by severe downturns in aerospace, construction, real estate and financial services.

The state will have to pay $10 million in interest alone on the $3.4 billion in IOUs issued during the standoff. Moreover, the state will have to pay $200 million over time in higher interest rates on its bonds because the state’s credit rating dropped during the crisis, the state treasurer’s office estimated.

The effects of the budget agreement, reached early Wednesday, have yet to work their way through the beleaguered economy.

For one thing, the new budget will probably mean a dramatic cut in government payrolls.

The budget would cut millions of dollars from the state bureaucracy, eliminate public information officers and cut other agencies.

The budget also reduces support for cities, counties and other local governments by $1.3 billion, which could result in layoffs or salary cuts for those employees.

Hensley projects a decline in state and local government employment in California of 40,000 in the next 12 to 18 months. Others say the cuts will be less drastic, on the order of 20,000 jobs.

Even so, Hensley said, “When those people are laid off and take pay cuts, they spend less, and that will affect other jobs.”

The new budget slashes $1.7 billion in health and welfare benefits, including a 5.8% cut in benefits to poor families and to the aged, blind and disabled. By one estimate, welfare cuts would amount to $38 a month for a mother with two children--money that will not be spent on groceries or new shoes.

“To the extent that government reduces the amount of money it makes available to blind, aged and or disabled (benefit) recipients, there’s obviously less purchasing power, which will be reflected by reduced performance by retailers,” said state Controller Gray Davis.

While the new state budget does not raise taxes, it would assess $500 million in new fees and redirect money from local agencies back to the state. Though some businesses say the fees will impose a financial hardship, some economists maintain that the fee increases are modest.

In any case, local agencies will probably be forced to raise their own fees or taxes to make up the revenue shortfall.

As an example, the Los Angeles County Sanitation Districts, which provides sewers and sewage treatment to thousands of industrial customers in the county, expects to lose 35% to 40% of its $35 million in state property tax revenue--a shortfall that will probably be made up by a fee hike, said Charles Carry, the agency’s chief engineer and general manager.

He argues that such increases will be burdensome to most businesses.

Still, says USC’s Chapman, “There’s no free lunch here. We may be pretending the state’s not raising taxes, but if you force local rates to go up, all we’re doing is hiding it. . . . It could be a which-shell-is-the-pea-hiding-under kind of game.”

For its part, the state will raise fees on everything from copies of tax returns to court filings.

Some fees may have the effect of targeting specific industries. In one case, the budget increases an assessment on companies that make toxic chemicals used in agricultural pesticides and household toilet bowl cleaners, among other things.

Paul Kronenberg, executive director of the Chemical Industry Council of California, a trade group, says the fee amounts to a new tax on the industry of $14.3 million a year over five years--a cost that will likely be passed on to customers.

“Any new fee increase or tax essentially makes it a little bit more difficult in terms of competitiveness here in California,” Kronenberg said.

But the greatest threat to the economy may be in the long run, critics said.

The spending package reduces funding for public education in kindergarten through 12th grade and sharply hikes fees for community colleges and state universities. It also cuts money for international trade offices and for health care, transportation and a host of other things that affect the quality of life in the state.

Such cuts may be shortsighted, critics said. “In the long term, the judgment has to be on whether you think the programs that were cut had substantial economic value,” economist Levy said. “We read the evidence as saying the investments in education and infrastructure are positive to long-term economic growth.”

Not everyone agreed. “The budget cuts are unfortunate, but absolutely and totally necessary,” said Don Butler, president of the 4,100-member Merchants and Manufacturers Assn., a Los Angeles trade group.