Waiting to Catch the Next Wave

Waiting to Catch the Next Wave California, once recession resistant, confronts a budget crisis

An unfamiliar kind of quake has shaken California: recession. Sometimes considered immune to economic woes, the nation's most populous state suffered an 11.2% unemployment rate in October, close to half a point higher than the national average in November. In 1978 the Golden State sunned itself in the warmth of a $3.7 billion state budget surplus, but now it is projected to be more than $ 1 billion in the red before the fiscal year ends on June 30. Last month California had to take out $400 million in bank loans just to pay ongoing bills, and has ceased selling state bonds for fear of eroding the state's credit rating, currently down a notch to double A plus. California's economy, which would be the seventh largest in the world if the state were a country, will show 1.2% negative growth rate this year. Says Congressman Vic Fazio: "The myth of being impervious to recession is over."

Until recently, California's burgeoning service sector and smaller-than-average manufacturing sector helped buffer the state from trouble. But the national recession eventually eroded California's splendid near isolation from the economic woes of the country at large. Signs of economic pressure are now evident across the state's diversified industrial base. By next June General Motors and Ford will have closed four out of five automobile assembly plants in the span of three years. The once booming housing industry is expected to finish the year with only 60,000 housing starts, down from 251,000 in 1977. The timber industry has already laid off 3,223 of its 21,000 workers, and the state expects to lose a total of 10,000 construction jobs in 1983. Even the much touted high-tech industries are feeling the pinch. The electronic-components field had back-to-back growth rates of 18% in 1978 and '79, but will probably close out this year with a 1.4% drop in sales. And the usually sparkling California wine industry reports sour grapes: only one-tenth of 1 % growth in shipments over last year.

While the recession hit later in California than in most states, it is making up in punch what it lacked in punctuality. One reason is an economic woe that California's taxpayers brought upon themselves. As low growth and high unemployment ate into projected tax revenues, Proposition 13, a statewide measure passed in 1978 that limits local property taxes, forced the state government to bail out towns, counties and school districts suddenly strapped for cash. The state is also doling out welfare checks to 2,233,507 Californians this year. The result: replacement of the state's once hefty surplus with a budget deficit estimated at between $1 billion and $1.8 billion for fiscal 1983.

The search for a way out has been uninspired. Not eager to make a tax increase his last act in office, outgoing Democratic Governor Jerry Brown has provided no help for his Republican successor, George Deukmejian, who promised no new taxes during his campaign. Says Deukmejian of Brown: "It's his budget, so to speak." A special session of the state legislature was convened last week, and could vote for tax hikes or service cuts before inauguration day, Jan. 3. But party leaders in the legislature show no appetite for action. The session may accomplish little beyond hammering out a politically ticklish redistricting plan, forced onto the agenda after voters rejected the previous plan in a referendum last June. Says Republican Assemblyman Patrick Nolan: "The special session is a farce."

California can get by on borrowed funds until February. But the state constitution requires a balanced budget by the end of the fiscal year. Despite a better economic forecast for 1983, California-based Bank of America predicts recovery in the state will be "weak by historical standards." Says Republican Senate Leader William Campbell: "We've got to bite the bullet. I went over the other day and took a look at that bullet, and I don't see that we've put any teeth marks on it yet."

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