STATE'S BUDGET GAP PUT AT $5.5 BILLION.

Byline: HARRISON SHEPPARD Sacramento Bureau

SACRAMENTO -- California will have to bridge a $5.5 billion budget gap next year as a slowing housing market drags down economic growth and tax revenue, the state's legislative analyst warned Wednesday.

In the first glimpse of the challenges facing the upcoming state budget, Legislative Analyst Elizabeth Hill said much of the shortfall is because the state needs to repay loans used to cover past deficits.

And she urged lawmakers to ratchet down spending amid a sluggish economy that's not expected to rebound for several years.

``I think at this advanced stage of the (national) economic expansion, one would expect states would be running operating surpluses,'' Hill said. ``Instead, California is running deficits.

``Basically, we're living on borrowed time.''

The forecast, which does not include money for any new programs, portends a potential struggle in January as Gov. Arnold Schwarzenegger seeks to balance the budget while making good on campaign vows to expand health care and other programs.

And the impact of tighter spending controls could ripple across Los Angeles County and elsewhere. Legislative Republicans indicated Wednesday that they will be in no mood to boost spending while the state is still running a deficit.

``One thing is clear -- this is not the time to return our state to the days of the runaway overspending that got our state into this budget mess in the first place,'' Republican Assembly Leader Mike Villines, R-Clovis, said in a written statement.

``Now more than ever, lawmakers and the governor must resist the temptation to create costly new government programs that California simply cannot afford.''

Education a priority

Democrats, too, said they would be cautious, but also indicated that funding education would remain a priority.

``Wiping out a multibillion-dollar deficit is going to require the same level of bipartisan cooperation we had last year,'' said Assembly Speaker Fabian Nunez, D-Los Angeles.

``It's a tough mountain to climb, but we can meet the challenge by remembering the strong message voters sent us to work together, balance the budget, and provide our schools with the resources they need.''

Senate President Pro Tem Don Perata, D-Oakland, added that spending from some of the $43 billion in bonds approved by voters this month could help offset some of the declines in the housing market.

Other findings in Hill's report include:

The current 2006-07 budget is doing better than expected. The state is likely to finish the fiscal year with a $3.1 billion reserve -- almost $1 billion higher than projected. Revenue is running $882 million higher and expenditures are $73 million lower than expected.

Spending in 2007-08 will grow by about 3.4 percent, to $105.6 billion, exceeding revenue by $5.5 billion. But the reserve left over from 2006-07 will help relieve that shortfall, creating an actual deficit of $2.4 billion.

Spending on K-12 education is expected to continue growing at a 4.1 percent rate for at least the next five years.

H.D. Palmer, a spokesman for the governor's Finance Department, noted that October revenues came in $200 million above forecast. But the state was expecting the slowdown in housing sales, he said.

``We've built in a slowdown in construction into our forecasts,'' Palmer said. ``We have already started taking that slowdown into account.''

In Southern California, economists are expecting similar slowdowns, but say the Los Angeles region will do better than other parts of the state in terms of compensating.

Ryan Ratcliff, an economist with UCLA's Anderson Forecast, said in Los Angeles County growth in professional business services, tourism and health care will help offset some of the housing declines.

``L.A. has been one of the success stories in terms of other sections of the economy stepping up and picking up the slack,'' Ratcliff said. ``Whereas Orange County has been on the same sort of slowdown on housing- related sectors of the economy, but they have not seen as big an upsurge in other parts.''

``The rest of Southern California has to hope they can mirror L.A.'s ability to find other sources of growth. That's the first time in a long time anybody has pointed at L.A. as one of the bright spots.''

Los Angeles County nonfarm employment is growing by about 1 percent this year and will likely slow to about 0.8 percent growth next year, he said.

Slower growth

Jack Kyser, chief economist with the Los Angeles County Economic Development Corp., agreed there will be slower growth in Los Angeles next year, though he is projecting employment growth at about 0.9 percent, or about 35,200 new jobs.

The actual job growth, he said, could be somewhat higher because those figures do not reflect expected increases in self-employment, which can include independent contractors and truck drivers.

The Inland Empire, Kyser said, will experience a 1.5 percent growth, or about 19,300 new jobs.

Ventura County, he said, will experience employment growth of about 0.1 percent, or 2,500 new jobs.

``There will be growth, but it will be somewhat slower,'' Kyser said. ``And a lot of that slowdown reflects what's happening in the housing residential-related sector. All counties in Southern California will see a decline in housing permits. People are especially concerned about an oversupply in San Diego and Riverside counties.''

MediaNews Sacramento Bureau Staff Writer Kate Folmar contributed to this report.

harrison.sheppard(at)dailynews.com

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