SACRAMENTO — State departments were paring down budgets. Dot-coms were doling out pink slips. And a statewide power crisis left consumers nervous about spending their extra cash.
Then came Sept. 11.
The aftermath of the terrorist attacks have further cut into the faltering California economy and forced already-strapped state departments to plan for the toughest times in years.
“Clearly, a wide variety of state programs are going to be at risk for significant cutbacks next year,” said Brad Williams, senior economist for the California legislative analyst’s office.
States across the nation are re-examining their budgets because of an already-weak economy compounded by the terrorist strikes.
But in California, a complex convergence of events — from financing the power crisis to the fallout from the attacks — has put the state in its most fragile fiscal position since the recession of the early 1990s, officials agree.
Before the strikes, state revenues already were sagging below forecasts by hundreds of millions of dollars. At the end of July, Gov. Gray Davis’ Department of Finance braced department heads to prepare for up to 10 percent budget reductions across the board.
The collapse of the high-tech industry was damaging the fiscal stability of California, which enjoyed massive infusions of income tax and capital gains revenues during the technology boom of the past four years.
Even before the attacks, economists say, California was on the brink of a recession.
Now, budget watchers are trying to determine what the attacks will do to the state’s economy.
“It’s too soon to really know, but we can be certain that it won’t be positive,” said Jean Ross, executive director of the California Budget Project.
Assembly Speaker Robert Hertzberg, D-Van Nuys, has created a task force to examine the toll on the state economy.
Assemblyman Tony Cardenas, an Arleta Democrat who chairs a special budget committee, said he will call legislative budget hearings before the session begins in January.
Davis said he will hold an economic summit with business and labor leaders to discuss a possible economic stimulus package for the state. Davis already has been urging residents to start flying again and he has set aside $5 million for radio, television and newspaper ads to encourage Californians to travel throughout the state.
And the governor has vetoed several bills in the past two weeks because they would increase spending.
California’s economy depends largely on taxes of sales, income and corporate profits — all of which have plunged from post-attacks decreased travel, tourism and airline industry layoffs.
Also, the attacks could spell trouble for two major California industries: agriculture and entertainment.
Hollywood studios have stepped up security amid fears they could be targeted. Crop dusters were grounded for two days after warnings that some of the suspected terrorists may have inquired about the agriculture airplanes.
Plus, law enforcement and other state agencies will spend more to increase security at state buildings, power plants, water projects and landmarks.
Beyond the attacks, an impasse over repaying the money the state spent for electricity this year led officials to predict dire budget consequences.
California spent $6.1 billion from its general fund to buy power on behalf of three cash-strapped utilities, which must be repaid by June 2002, the end of the current fiscal year, or the money will have to be cut from the budget.
Friday, a major credit rating agency said it may downgrade the state’s bond rating for the second time this year because of the uncertainty surrounding the bond deal.
Even if the energy costs are repaid, the $2.6 billion reserve in the $103 billion 2001-02 budget will likely disappear in a few months.
Already the first three months of the fiscal year, July through September, showed revenues $1 billion below forecasts, according to the legislative analyst’s office.
That will mean cuts of some kind, either hiring freezes, spending reductions, borrowing or possibly higher taxes.
“These are big numbers and you don’t fix problems like this by trimming,” said Sen. Steve Peace, an El Cajon Democrat and chairman of the Senate Budget Committee.
But Department of Finance Chief Economist Ted Gibson said he and others are hopeful the problem will not drag into the long-term.
He doubts the state’s economic fortunes will plunge to the depths of the early-1990s recession, partly because of an ironic twist to the tragedies.
The response could help boost some key sectors in the state, from defense contractors to biotech firms aiding in new efforts to prevent bio-terrorism.
But a major economic question remains. What if California is hit by a terrorist attack?
Davis — who said authorities have warned him the state could be a target — has launched a statewide anti-terrorism effort including a database for information on threats and suspected terrorists.
A strike here could cripple the already-uncertain economy, state Controller Kathleen Connell said.
“All bets are off if we have a terrorist act that impacts California directly,” Connell said. “Then our best economic projections are going to be voided.”