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http://www.dailynews.com/news/articles/0301/19/new06.asp

Monday, March 19, 2001

Economic lull may drain state

By Will Shuck Sacramento Bureau

SACRAMENTO -- The tumbling stock market, drop in personal spending and California's mushrooming energy crisis together mean less money for everything from road repair to child care, government officials say.

It won't be as bad as the 1990s, analysts say, but the halcyon days of eye-popping state budget surpluses are over -- at least for now.

Northern California, riding high on the wealth of Silicon Valley, will probably be hit harder than the Southland, they say.

Southern California was pummeled in the 1990s in part because the economy was so heavily dependent on aerospace.

When the bottom dropped out, the region was forced to rebuild itself with a more diversified base.

Brad Williams, senior economist with the state's nonpartisan Legislative Analyst Office, says the Southland will benefit from that restructure in the months to come.

"With their diversified economy and low unemployment, the Southland will not experience anything like the 1990s," he said. "And, anyway, even though the risk of recession is clearly higher than before, what we're really looking at is more like a growth pause."

The effects of a bear market -- the stock market posted its biggest point drop in history last week -- will probably be most apparent in Silicon Valley and surrounding areas. Real estate prices could dip, but still remain far higher than the statewide average. And people who relied on stock options and dividends will have to make due with less, Williams said.

"The area that benefited most from the high-tech boom is going to feel the effects of the drop the most," he said.

Probably no one was more reliant on a soaring stock market than the state itself. With each rise in the market, the state reaped billions in capital gains taxes. Between the taxes on gains and the ever-increasing high-tech boom in stock options, the state's bank accounts bulged at the seams for several years.

In 1995, California took in $25 billion in tax on capital gains and stock options. Last year, that figure had blossomed over $160 billion, Williams said.

But California's rosy outlook has darkened recently, from the extraordinary cost of the electricity crisis, as well as from falling stock prices and an increasing number of corporate layoffs.

Late last year, state officials projected a surplus of nearly $10 billion. But last month those estimates were scaled back to about $8 billion, and "now that's a question" of how much further it will drop, Williams said.

Legislative Analyst Elizabeth Hill, the Legislature's chief budget adviser, cautioned lawmakers last month to rein in their desire to spend. She questioned many of the governor's most expensive proposals and said the state should hold more on reserve and enter into fewer financial commitments.

"Clearly, the state needs as much reserve as possible when things are so volatile," Hill said. "We still believe caution is very important."

Hill said the combination of a slowing national economy, a falling stock market, and an electricity crisis "is one of the more unusual circumstances I've seen in my 25 years doing this."

She said she will have more data as tax revenue comes in over the next two months. Analysts anticipated some slowing this year, she said, "but now we're trying to figure out if it's slowing even more than expected."

Local governments probably won't feel the same sting of a stock plunge the state will, Williams said, since counties and cities don't collect income tax.

Closer to home for cities is the anticipated drop in consumer spending, which cuts into sales tax revenue. When the stock market turns sour, people feel less secure about spending and that turns Wall Street's problem into Main Street's pain.