Anderson forecast predicts stable California economy

The UCLA Anderson Forecast predicted a stable but unspectacular
California economy in its quarterly report on the nation and
California’s budget last Wednesday. The forecast also
discussed state finances under Gov. Arnold Schwarzenegger and the
state of the housing market.

Michael Bazdarich, senior economist of the Anderson forecast,
said large budget deficits remain in the California economy, and
the “proliferation of gimmicks in budget accounting has
continued” over from former Gov. Gray Davis to the
Schwarzenegger administration.

The state has had a fiscally irresponsible budget and has used
“financial maneuvering that, if used in your own business,
would probably get you thrown in jail,” Bazdarich said.

Bazdarich’s presentation described how California
officials have manipulated state finances three times in an effort
to pay back some of the state’s $11.2 billion deficit.

Sales tax revenues initially were diverted to pay interest and
principal on the state’s debt. Property tax revenues were
then diverted to local governments to compensate for their lost
sales tax revenues.

Then, to compensate public schools for lost property tax
revenues, general fund outlays were reassigned to them.

The result, Bazdarich found, was that the state’s debt
problems were paid with money from general fund outlays meant for
education. He also found that through the use of accounting
gimmicks, the state has hidden dipping revenues from its reports on
the economy.

In order to pay off the large debt accumulated, the state needed
a major influx of money. Two propositions passed by California
voters in the November general election moved the state toward that
goal.

Proposition 57 allowed the state to sell $15 billion in bonds to
help pay off its debt. Proposition 58 amended the state
constitution to ensure the enactment of a balanced state budget
with reserve requirements and limits on future borrowing used to
finance state budget deficits.

The passage of these two propositions has helped the state make
progress in fixing its budget problems, Bazdarich said.

UCLA Anderson Forecast Director Edward Leamer spoke about stable
but decreased growth in the economy and his reservations for a
continued high rate of home sales.

“2005 is a critical and deceptively difficult year,”
Leamer said.

Maintaining the current high rate of home sales is dependent on
rising home prices and on consumers having incomes capable of
sustaining such purchases. Also, increased home construction is
likely to cause the sale of current homes to decrease and lead to a
deflation in the current housing bubble, he said.

One aspect that may save the housing market is the productivity
miracle, the phenomenon in which improving information technology
has allowed workers to get more done in less time, Learner
said.

National productivity was constant at 1.7 percent growth
annually from the 1970s to 1998 but has now doubled in the years
following the “dot-com boom” of 1998.

Leamer also explained that the rise in gross domestic product
each year may be the result of people working more hours each week,
not increased productivity from information technology.

Christopher Thornberg, senior economist of the Anderson
forecast, found California employment rates to be higher compared
to the rest of the United States in most areas excluding
manufacturing and health care.

Taxable sales and income are expected to increase in the Bay
Area, and vacancy rates in California real estate are believed to
be going down, Thornberg said.

He emphasized the importance of increasing the allocated budget
for education. “These are the kids who are going to be
supporting you in 20 or 30 years.”

Richard Riordan, California’s secretary of education, was
also present at the forecast event and agreed that more needed to
be done with California’s schools.

The future of California depends on a “college-educated
workforce” capable of handling the demands of the economy,
said Riordan. He suggested a tightening of the standards expected
of students and holding them accountable for their learning.