California's Deep Recession Clouds Over Its Land-of-Sunshine Image

SAN FRANCISCO -- California, which has long enjoyed a reputation as America's promised land, is running into a recession that threatens its sparkling image.

Nearly 800,000 people moved to California last year in search of the good life, but they found an unemployment rate of 7.8%, compared with a 6.8% national average, and a government saddled with a multibillion-dollar deficit.

Last year, about 400,000 people left the state, the most populous in the nation. It has the world's eighth-largest economy.

Business Sentiment Weakens

The California Round Table, an organization of top business executives, recently found that 25% of more than 1,400 companies contacted planned to leave the state within two years, up from 13% a year ago.

Between mid-1990 and mid-1991, the state lost 380,000 jobs.

"Most people in California are very pessimistic," said Lynn Reaser, vice president and senior economist at First Interstate Bancorp, Los Angeles, after a recent presentation of the bank's economic outlook. "Many of them believe that the situation is the worst they have ever seen."

Recovery Seen in 1993

But Ms. Reaser disputed some reports that the state is suffering its worst recession of the post-war era.

She said the 1981-82 recession, with its double-digit inflation, high unemployment, and interest rates of nearly 20%, was far worse.

First Interstate believes the state should recover next year and in 1993 but says its growth may not be the kind that led the nation in the 1980s.

Politicians Under Pressure

Pressure is mounting on California Gov. Pete Wilson and the Legislature to create a more favorable business climate.

Surveys show that businesses want to reform the workers compensation system, reduce taxes, and cut the red tape involved in meeting the state's stringent environmental standards.

"California has been shooting itself in the foot too long -- and it's finally begun to hurt," Julie Meier Wright, director of the Department of Commerce, told members of the state Senate Finance Committee.

Population Growth to Persist

The state must make drastic changes to create the 250,000 new jobs needed each year just to keep pace with population growth expected in the coming decade, said Ms. Wright.

California's population is expected to grow to 36 million by the end of the century, from the current 30 million -- an increase large enough to fill eight cities the size of San Francisco.

Despite higher taxes this year, Gov. Wilson faces a $2 billion to $3 billion budget gap and the threat that Standard & Poor's Corp. will reduce the state's top-level credit rating.

Lawmakers are urging the governor to call a special legislative session to deal with the crisis, but they have so far refused to meet his demands for more spending cuts and no new tax increases.

Demand for Services

Gov. Wilson has taken to the lecture circuit, saying that demographic changes are worsening California's problems. Groups that use state services msot -- students, welfare recipients, prisoners, and medical insurance beneficiaries -- are growing faster than the taxpaying population, he said.

The governor's aides warn that even a strong economic recovery could leave California with a $20 billion annual budget deficit by the year 2000, unless demand on the government purse is reduced.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.