Fed cuts would have limited immediate Calif impact

Source: The Business Journal
Written by Associated Press

(AP) — Looming federal spending cuts are expected to dampen California's economic recovery at a time when a housing rebound and job growth are gaining traction, but come Friday the immediate effect may not prove to be the fiscal doomsday that President Barack Obama has predicted. The White House estimates that in California, 64,000 civilian defense workers would be furloughed and 1,200 teaching and teacher aid jobs would be put at risk from the mandatory budget reductions known as the "sequester." Obama administration officials also said the state will see program cuts in children's vaccines, senior nutrition, student work-study jobs and assistance for victims of domestic violence. While a bigger concern is what might happen in the long term, most of the effects will not be felt right away. Even if the $85 billion in across-the-board reductions happen nationally, the amount cut in California will be just a fraction of the state's $2 trillion gross domestic product, which according to 2012 estimates would be the world's eighth largest economy. Federal furloughs won't start for a month due to notification requirements, giving negotiators some breathing room to work on a deal. And while Obama said there is no smart way to let the cuts kick in, members of Congress are considering taking action to give agencies flexibility over what to cut. Meanwhile, some of the biggest drivers of federal spending such as Social Security and Medicaid are exempt from the automatic reductions. "You always have to assume that nothing will happen for a month, and by then they may have resolved it," said Stephen Levy, director and senior economist at the Palo Alto-based Center for Continuing Study of the California Economy. "Who knows who's playing chicken?" Most state economic forecasts already have accounted for some kind of federal budget cuts, meaning that California can expect tepid growth of about 2 percent for this year. The biggest fear economists and state officials have is any long-term impacts on California's recovery. "If sequestration results in a broader decline in consumer or business confidence or the stock market, the slowdown could be more pronounced," said Jason Sisney of the state's nonpartisan Legislative Analyst's Office. Robert A. Kleinhenz, chief economist at the Los Angeles County Economic Development Corporation, said federal cuts eventually could put about 175,000 non-defense jobs in California at stake because of their duration — $1.2 trillion over 10 years. He said the fallout from the political impasse is hard to quantify because it creates so much uncertainty for the private sector. Employers may not hire or put off expansion plans, while employees face lower wages and potential job losses. The cuts come at a time when California's economy is recovering from the recession and is adding more jobs than any other state. Political leaders are hoping California's own budget remains balanced. They will mean less funding for science and health research, which would slow innovation on clean energy technology and treatments for diseases. And just like everywhere else, air traffic and safety reductions could trigger longer wait times at security checkpoints, screening at customs and border crossings could take longer, and national parks could reduce operating hours. One notable cut is research funding, because many federal awards go to California's universities through training grants, fellowships, and research and development contracts. The University of California system receives approximately $3.5 billion a year in federal funding, largely from the National Institutes of Health to research cancer, heart disease and a host of other ailments. Cuts from the National Science Foundation and other federal agencies also would affect clean energy, computing and other new technology. "It's not like turning on and off a switch. If you start slowing down this kind of activity, it takes a while to bring it back up," said Gary Falle, a lobbyist for the UC system in Washington, D.C. For college students, there also will be less student aid in the form of work-study jobs. The White House estimates that about 9,600 fewer low-income students would receive work-study jobs in California. Between 350,000 and 400,000 Californians could be affected by a 10 percent reduction in extended unemployment benefits, said Loree Levy, a spokeswoman for the state Employment Development Department. "These are the benefits that long-term unemployed individuals receive once they run out of regular state-provided benefits," she said. Levy said it's not clear yet whether that will mean less money for the unemployed because the state has yet to receive guidance from the Labor Department. While California's economy relies far less on the military than it did in the past, the military budget reductions would still be felt, especially in the communities around bases. Military officials and defense contractors are advocating against cuts to Marine Corps bases in Miramar and Camp Pendleton, as well as naval bases in Coronado and San Diego. March Air Reserve Base near Riverside, the largest air reserve base in the country, could see training flight hours reduced by almost 20 percent and furloughs to civilian employees. Some Republicans say cuts are necessary to bring the national debt under control, but they don't want to see a disproportionate cut on defense. The automatic spending cuts were designed to be equally split between defense and domestic discretionary spending. "I think one of the things we do have to do is cut spending," state Assemblyman Jeff Gorell, R-Camarillo, said, adding that he saw "a tremendous amount of waste" during his time in the military.

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