The UCLA Anderson Forecast predicted a stable but unspectacular California economy in its quarterly report on the nation and California’s budget last Wednesday. The forecast also discussed state finances under Gov. Arnold Schwarzenegger and the state of the housing market.
Michael Bazdarich, senior economist of the Anderson forecast, said large budget deficits remain in the California economy, and the “proliferation of gimmicks in budget accounting has continued” over from former Gov. Gray Davis to the Schwarzenegger administration.
The state has had a fiscally irresponsible budget and has used “financial maneuvering that, if used in your own business, would probably get you thrown in jail,” Bazdarich said.
Bazdarich’s presentation described how California officials have manipulated state finances three times in an effort to pay back some of the state’s $11.2 billion deficit.
Sales tax revenues initially were diverted to pay interest and principal on the state’s debt. Property tax revenues were then diverted to local governments to compensate for their lost sales tax revenues.
Then, to compensate public schools for lost property tax revenues, general fund outlays were reassigned to them.
The result, Bazdarich found, was that the state’s debt problems were paid with money from general fund outlays meant for education. He also found that through the use of accounting gimmicks, the state has hidden dipping revenues from its reports on the economy.
In order to pay off the large debt accumulated, the state needed a major influx of money. Two propositions passed by California voters in the November general election moved the state toward that goal.
Proposition 57 allowed the state to sell $15 billion in bonds to help pay off its debt. Proposition 58 amended the state constitution to ensure the enactment of a balanced state budget with reserve requirements and limits on future borrowing used to finance state budget deficits.
The passage of these two propositions has helped the state make progress in fixing its budget problems, Bazdarich said.
UCLA Anderson Forecast Director Edward Leamer spoke about stable but decreased growth in the economy and his reservations for a continued high rate of home sales.
“2005 is a critical and deceptively difficult year,” Leamer said.
Maintaining the current high rate of home sales is dependent on rising home prices and on consumers having incomes capable of sustaining such purchases. Also, increased home construction is likely to cause the sale of current homes to decrease and lead to a deflation in the current housing bubble, he said.
One aspect that may save the housing market is the productivity miracle, the phenomenon in which improving information technology has allowed workers to get more done in less time, Learner said.
National productivity was constant at 1.7 percent growth annually from the 1970s to 1998 but has now doubled in the years following the “dot-com boom” of 1998.
Leamer also explained that the rise in gross domestic product each year may be the result of people working more hours each week, not increased productivity from information technology.
Christopher Thornberg, senior economist of the Anderson forecast, found California employment rates to be higher compared to the rest of the United States in most areas excluding manufacturing and health care.
Taxable sales and income are expected to increase in the Bay Area, and vacancy rates in California real estate are believed to be going down, Thornberg said.
He emphasized the importance of increasing the allocated budget for education. “These are the kids who are going to be supporting you in 20 or 30 years.”
Richard Riordan, California’s secretary of education, was also present at the forecast event and agreed that more needed to be done with California’s schools.
The future of California depends on a “college-educated workforce” capable of handling the demands of the economy, said Riordan. He suggested a tightening of the standards expected of students and holding them accountable for their learning.