SACRAMENTO, Calif. (Legal Newsline)-As California Attorney General Jerry Brown considers a run for governor, officials said Wednesday the state's fiscal health is deteriorating.

The Golden State will face a nearly $21 billion budget shortfall over the next year and a half, a report Wednesday by the nonpartisan Legislative Analyst's Office said.

Legislative Analyst Mac Taylor said there is a $6.3 billion shortfall in the current fiscal year budget, which Gov. Arnold Schwarzenegger signed in July. The deficit, he said, will expand to $14.4 billion for fiscal year 2010-2011.

Amid the state's financial woes, Standard & Poor's and Moody's Investors Service downgraded California's credit rating this year.

Standard & Poor's has given California an "A" bond rating, which is the lowest of any state except for a handful of states whose bonds are not rated at all by the Wall Street credit-scoring firms. The state's lackluster credit ratings mean taxpayers must pay increased borrowing costs.

In his fiscal outlook, Taylor said the Republican governor and the Democratic-controlled state Legislature must make deep program cuts, raise taxes, borrow money or adopt a combination of the three to make the cash-strapped state's ends meet.

"The scale of the deficits is so vast that we know of no way that the Legislature, the governor and voters can avoid making additional, very difficult choices about state priorities," the LAO report said.
"In the coming years, major state spending programs will have to be significantly reduced. Policymakers will also need to add revenues to the mix."

Taylor said officials should act quickly to balance the state's books.
"The sooner they act, the better," Taylor said. "Because often times, it takes a few months to implement expenditure reduction. They're going to have to focus on long-lasting solutions."

Unless the state's spending and revenues are brought into line, California, the nation's most populous state, will face at least $20 billion deficits each year through 2015, Taylor said.

Part of the reason California faces a shortfall in the current year is that the governor and legislators relied on chancy money-raising solutions to help balance the budget.

Among them: a $1 billion partial sale of the State Compensation Insurance Fund. The plan has been challenged in the courts by state Insurance Commissioner Steve Poizner, a Republican candidate for governor.

There was a ray of sunshine in the LAO report.

The office, which serves as the Legislature's fiscal and policy analyst, said California's sluggish economy is beginning to gain momentum, meaning that the state will likely reap more sales and income taxes and capital gains assessments in the coming years.

Brown who has been considering a run for governor for months said last week that part of the reason he has not officially launched a campaign is because of the state's financial woes.

"The budget is quite a challenge. It is one reason why I have an 'exploratory campaign for governor' and not a 'campaign for governor,'" said Brown, who is considering a run for the post he held from 1975 to 1983.

California's budget process has been particularly bitter in recent years because the state has been hemorrhaging red ink.

To solve the problem, Democrats have insisted that cuts alone not be used to balance budgets, while most Republicans have been steadfast in their opposition to tax and fee hikes to help avert program reductions.

Although Brown has not formally entered the gubernatorial race, he has formed an exploratory committee, allowing him to raise money for a potential bid.

Running for the GOP nomination to succeed Schwarzenegger in addition to Poizner is former EBay Chief Executive Meg Whitman and former U.S. Rep. Tom Campbell.

Schwarzenegger is unable to seek reelection because of term limits. Brown was governor before California's term limits law was enacted, allowing him to run again.

From Legal Newsline: Reach staff reporter Chris Rizo at chrisrizo@legalnewsline.com.