Early effects of budget impasse to be felt most in public sector.

When it comes to California's economy, the sky is not falling -- not yet anyway.

Despite Sacramento's inability to pass a budget for the 2003-04 fiscal year and a looming $38 billion deficit that has sharply lowered ratings on California bonds, the short-term effect on the private sector is expected to be modest.

Most of the impact is being concentrated in the public sector, with lawmakers receiving no paychecks and a delay in some payments to community colleges and university systems. In addition, Gov. Gray Davis extended a hiring freeze and cut as many as 20,000 vacant state positions.

Also feeling the heat early are private sector vendors doing business with the state. The county's 371 nursing homes are bracing for the inevitable payment delays caused by the impasse, as well as a potential 15 percent cut in Medi-Cal funding.

"We're all very concerned about (the budget)," said Eleanore Davis, president of Medical Disposal Transport Inc., a 15-employee Van Nuys company that specializes in removing medical waste from about 800 facilities from Ventura County to the Mexican border. "If they delay payment any more, I have no operating cash to put gas in my trucks."

The state could continue to function on a pool of $5 billion from the June sale of revenue anticipation notes until sometime next month. If a budget compromise isn't reached at that point all bets are off.

For now, however, economists generally minimize the overall damage. The explanation is that the state's economy is much too large and complex for even a public sector crisis to overtake the general economy in the near term. In addition, there are several salutary signs, such as an improving stock market, the effects of federal tax cuts and projections that overall economic growth will pick up in the second half of the year.

"You and I don't absorb a lot of government transfers, we pay for them," said Christopher Thornberg, senior economist at the Anderson School at UCLA. "Your standard person is really not going to see anything."

Even Moody's Investor Service, which last week put about $34 billion of state debt on its watch list for possible downgrade, expected that California would almost certainly pay its debts -- eventually.

"Despite California's chronic history of late budget adoption, the state has never failed to enact a budget in time to enable it to meet its debt obligations," Moody's said in a report.

Not that the outlook was all that rosy before the impasse. In last month's quarterly report on the California economy, the UCLA Anderson Forecast reflected an increasingly pessimistic view of the state's recovery prospects, lowering employment growth, personal income and taxable sales projections for 2003 and 2004 from its March figures.

While projecting that L.A. County unemployment would fall to 6.6 percent by the end of next year from 6.8 percent last year, the UCLA Anderson Forecast estimated there would be a loss of 50,000 state and local government jobs in California by next July.

The big question among economists is what happens if the stalemate drags on for weeks or even months with no sign of resolution. Even the most sanguine economists concede that the dynamics could change, particularly if concern grows about the ability of the state to maintain its liquidity.

"They cannot issue revenue anticipation notes without an enacted budget," said Moody's analyst Renee Boicourt. "And they need the infusion of cash to remain liquid into the fall."

Already, some extreme possibilities have been raised, such as forcing all state employees to work at the minimum wage, a prospect that would not only decimate consumer spending for those workers but inflict psychological damage for all consumers in the state.

Other imponderables are Davis' plan to triple vehicle registration fees, which is already being challenged by Republican legislators, as well as a likely hike in either sales or income tax that would reduce the disposable income of citizens and businesses alike.

But even with a budget deficit that is expected to be an issue for years and even decades to come, as. well as a state bond rating reduction that will increase the cost of California's debt, the threat of tax hikes is unlikely to sway businesses or crash the economy, said Thornberg.

"Have we hit a point where businesses aren't going to come here? No," said Thornberg. "California has always been an expensive place to do business. But there are still people moving here, it's a great place to live and it's an international center."

Bloomberg News contributed to this story.

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