LOS ANGELES -- Defense spending cutbacks are proving very troublesome for California, but the state's economic outlook hinges even more on its ability to solve other basic problems, a state commission said this week.

"California's future success depends not just on how well it addresses defense cutbacks, but how government and business leaders resolve the broader and more fundamental problems that burden the state's economy," the Commission on State Finance said in a report studying the impact of defense cuts on the state.

The report, released Tuesday, concludes that about 22% of the 800,000 jobs lost in the state since May 1990 are linked to aerospace industry cutbacks. This estimate includes aerospace job losses and the ripple effects in other sectors of the economy.

But the commission noted that the balance of job losses reflects other factors, including the national recession, steep construction declines, and financial industry consolidation.

"Thus, while defense spending has contributed to the severity of the recession, it is but one of several factors responsible for the economic woes confronting California in the early 1990s," the report notes.

The commission traced the primary cause of defense cutbacks in the state to major reductions in the national defense budget. These losses hurt California more than other areas because the state commands about 21% of total U.S. defense spending for 1992, the commission said.

Although the defense cuts "are clearly painful and disruptive to California's economy," the commission also noted that the state made similar adjustments after the Vietnam War defense buildup.

But in contrast to 1968, when defense spending accounted for 14% of California's gross state product, such funding today contributes less than 7% to the state's overall economy, the commission said.

California's "increased size and industry diversification are two key factors working in the state's favor as it copes with defense cutbacks in the 1990s," the commission said.

The longer-term effect of the defense cuts also "could be less ominous" if California captures some of the so-called peace dividend resulting from re-directed national spending. But those benefits "will probably not fully offset the losses in defense dollars," the commission's report adds.

The report also warns against concluding "that California will easily or automatically recover from the economic difficulties that it is experiencing." High land and labor costs and complex regulations are among the forces working against the state's economic vitality, the report says.

"Consequently, it is important that defense adjustment strategies be considered as part of a more comprehensive economic plan" that attracts and retain industries based on the state's strengths, the report says.

The report notes growing evidence that a fundamental economic restructuring is occurring in Southern California. Many defense-related job losses have hit hardest in that region, particularly Los Angeles County, the report says. But it also notes that job losses are even higher in non-defense, low-technology industries.

The report also observes that one-quarter of the defense spending in California finances various military installations.

Planned closures and realignments of these facilities "will have reasonably small statewide impacts," the report says. But the reductions could have "major impacts on local communities, especially in rural counties."

The largest impact will be felt in Monterey County, where Fort Ord produces more than 20% of the economic activity, according to the report.

Members of the commission's staff can be reached at 916-653-2664 for more information.

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