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California Association of Private Postsecondary Schools

California, on Brink of Recovery, Braces for Setback on Federal Aid

03/06/2013

THE NEW YORK TIMES.  MARCH 5, 2013.  After years of ballooning budget deficits, California finally seemed on firmer footing. Unemployment remained high, but revenues and housing prices were up. Taxpayers even voted themselves a tax increase to bring deficits down.

And then came the automatic federal budget cuts known as sequestration.

As the $85 billion in spending cuts slowly roll out nationwide, California officials are girding themselves for a blow not only to the state’s large military industry but also to its nascent economic recovery. Still, experts say, it will most likely slow down, though not derail, the state’s economic growth.

The cuts, which began to take effect on Friday and will accelerate as time passes, will amount to a loss of an estimated $9 billion for California this year. The military industry will incur the biggest reduction, $3.2 billion, but education, social programs and other areas that were hit particularly hard by California’s budget turmoil in recent years will also face cuts.

State officials await word from Washington on exactly how the cuts will be put in place in the weeks and months ahead, hoping that the long-term ripple effects on California’s consumers and businesses will become clearer.

“It’s very frustrating for a state like California, where we’ve had housing-market and job-market gains beginning to solidify here,” said Jason Sisney, the director of state finance at the nonpartisan California Legislative Analyst’s Office. “And just as that’s happening, we have the federal government taking actions that could impede that recovery.”

Despite the size of military and federal programs in California, the state’s $2 trillion economy is larger and more diverse than the economies of other states, and less dependent on federal workers.

“California will be an average state,” said Stephen Levy, the director of the Center for Continuing Study of the California Economy. “We won’t be hit less, and we won’t be hit more.”

Jerry Nickelsburg, an economics professor and expert on the California economy at the Anderson School of Management at the University of California, Los Angeles, said: “But is it sufficient to choke off the recovery in California? I think the answer is no. Will it slow the growth of the California economy? The answer is yes.”

Because the automatic budget cuts had been set up to force Democrats and Republicans to negotiate over cuts and spending — and not to be actually put in place — California officials, like their counterparts in other state capitals, have received only general guidance so far from the Office of Management and Budget on how to carry out the cuts. But in the coming weeks, federal agencies are expected to provide details on their respective spending cuts.

“As we learn more the specifics on how they’re going to do that, then we will have a better sense of how it will impact the state,” said H. D. Palmer, a deputy director at the California Department of Finance.

State officials could have to adjust for the cuts in the state budget revision scheduled for May. In January, Gov. Jerry Brown announced the first balanced budget in years, thanks largely to a temporary tax surcharge that voters approved in November.

The budget cuts are expected to be felt strongly in the San Diego area, where the military industry plays a significant role in the economy. According to the White House, California’s 64,000 civilian military workers will be furloughed starting next month, most likely by losing a day of work a week over several months. The White House estimates that the furloughs will total a $400 million reduction in gross pay this year.

Military contractors in the area are also bracing for cuts.

Marion C. Blakey, the president of the Aerospace Industries Association, a trade group based in Arlington, Va., said larger contractors could absorb the loss of an anticipated order. But smaller members, she said, could be forced to lay off highly paid engineers, and in that way dampen the regional economy.

“These are companies that often do not have the resilience and flexibility to take this kind of body blow,” Ms. Blakey said, adding that these were typically highly specialized companies incapable of quickly shifting their businesses. “As an industry, we are very concerned about the third and fourth tier in the supply chain, and California has a lot of those kinds of companies.”

Gregory Bloom, a member of the trade group’s executive board and the president of Seal Science, a 120-employee aerospace company in Irvine, Calif., said his business had already suffered from the cuts. Because of the uncertainty surrounding federal financing of military-related programs, his company had lost two top engineers and was unable to fill four existing engineering positions, he said.

“In my entire career, I’ve never been in a situation where I can’t at least put some probability on what’s going to happen,” Mr. Bloom said, adding that he had delayed expanding capacity at a plant as a result. “There’s absolutely no way to plan.”

The cuts could hurt California’s schools and colleges, whose budgets have been slashed in recent years. The University of California system is expected to face at least a 5 percent cut in the $3.5 billion it receives annually in federal research money. Cuts in federal student aid programs will affect the next academic year.

“As a family starts to plan for what’s going to happen next year — how much money do I need to send my son or daughter to school? — these are unknowns right now until we get more information from the federal government,” said Gary Falle, the University of California’s associate vice president for federal government relations.

According to the White House, California will also lose $88 million in federal money for primary and secondary education this year. Though Washington accounts for less than 11 percent of the state’s budget for schools, that share has taken on increasing weight in recent years because of state cuts, said Erika Webb-Hughes, an official at the California Department of Education’s government affairs division.

The cuts are likely to affect disadvantaged students the most, including those with disabilities, Ms. Webb-Hughes said. The uncertainty of the magnitude of the cuts will also make it difficult for school districts to plan for next year because, by state law, they must notify staff members of their future employment status by March 15.

“People will be sending out pink slips,” Ms. Webb-Hughes said. “Even if at the end of the year there is a miraculous agreement in the Congress that averts a majority of this issue, the damage is already done.”