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California's key revenue report near, may trigger cuts

By Jim Christie

SAN FRANCISCO (Reuters) - California's leaders will next week get their first look at the state's September revenue, which will go a long way to determining whether they will need to cut yet more spending.

California's fiscal year began in July and that month's revenue and August revenue do not provide a reliable picture of the state's revenue trend, but September revenue does as it includes estimated quarterly payments for corporate taxes and personal income taxes, the state's key source of revenue.

If September revenue tracks expectations in the state budget, Governor Jerry Brown and lawmakers may not need to worry about a December review that could trigger spending cuts. The budget provides for cuts, including deep cuts to school spending, if revenue falls short of estimates.

Brown and lawmakers crafted the spending plan in June, closing a $10 billion deficit with cuts, payment deferrals, some fees and $4 billion expected to be generated by the state's slow recovery from its brutal downturn.

Chapman University's Anderson Center for Economic Research cast doubt on such a revenue surge on Thursday with a report on its index that tracks manufacturing purchasing managers' expectations in California. The index has dropped for two consecutive quarters to its lowest point since the third quarter of 2009, a signal that the most populous U.S. state's economy appears to be losing it modest momentum.

"It looks like they are expecting slower growth compared with the first nine months of the year," said Raymond Sfeir, an economist at the center.

FRAGILE RECOVERY AT RISK

If September revenue falters as the state economy cools, Brown's finance department will swing into action to craft options for spending cuts to be reviewed in December in order to put them into effect next year, said Mike Genest, finance director under former Governor Arnold Schwarzenegger.

"It's a cycle that you have to start in September if you're going to be done in December," said Genest, who is among the many observers of California's budget expecting spending cuts.

"I think that trigger is going to be pulled," Genest said.

Municipal debt market participants largely agree. At The Bond Buyer's recent California conference, 85 percent of survey attendees said they expect cuts are coming.

State Controller John Chiang's office next week will present a first take on California's September revenue. A finance department report on the month will follow. Analysts said they are skeptical the reports will show the budget's $4 billion in better-than-expected revenue is taking shape.

California's economy -- saddled with 12.1 percent unemployment, compared with a national average of 9.1 percent -- simply remains too weak, said Jordan Levine with consultancy Beacon Economics in Los Angeles.

"The recovery is definitely fragile," Levine said.

That's underscored by job gains in Los Angeles County. It gained 8,200 nonfarm jobs in August from a year earlier, said Nancy Sidhu, chief economist at the Los Angeles County Economic Development Corporation.

The gain was meager for California's most populous county, but with its jobless rate well over 12 percent, "This is progress," said Sidhu.

RECOVERY 'VIRTUALLY IMPERCEPTIBLE'

Employers in neighboring Orange County are also cautious. "Employers seem a little hesitant to add to payrolls -- and at the same time consumer confidence has been dented," said Esmael Adibi of Chapman's Anderson Center.

Payrolls are up in San Diego County but it is struggling to break free of its slump, said Alan Gin of the University of San Diego's Burnham-Moores Center for Real Estate: "It's just not growing fast enough to get us out of the hole we're in."

In northern California, Silicon Valley is a bright spot for the San Francisco Bay area but business elsewhere in the region is wobbly. "It's fair to say things are beginning to soften," said Jon Haveman, chief economist at the Bay Area Council's Economic Institute.

Meanwhile, inland California is in dire condition. The Central Valley and Southern California's Inland Empire are seen struggling for years to come with foreclosure gluts ruling out renewed home building in the once fast-growing regions -- now beset by some of the nation's highest unemployment rates.

"The recovery is virtually imperceptible in the valley," said Jeffrey Michael of the Business Forecasting Center at the University of the Pacific's Eberhardt School of Business.

Inland California's hard times will weigh on the state economy, according to The UCLA Anderson Forecast unit. It sees a slight rise in the state's jobless rate over the next two quarters and a "slow trajectory toward, but not reaching, single-digit unemployment the following five quarters."

(Editing by Kenneth Barry)

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