Since we began the Capital Notes Podcast last year, one topic is far and away the most talked about: California's screwed up finances.

So why should this week be any different?

Fresh off the diversion of campaign coverage, we're back on the money beat. And as Capitol Weekly editor Anthony York and I surmise, it looks like it's going to get a lot worse before it gets better.

It's kind of hard to be surprised by bad economic and budget news in California these days. After all, there's virtual unanimty that we're in deep you-know-what.

And yet, today's full analysis by the Legislature's nonpartisan budget watchers is still shocking... probably for its opinion that the problems stretch across almost every single aspect of state revenues and expenditures.

The annual fiscal outlook, the first under newly minted Legislative Analyst Mac Taylor, adds some details to the gloomy projections the LAO released just nine days ago. That projection focused on a $28 billion gap by July 2010.

Ready for some more bad news?

The Five Year Flu: The LAO report concludes the current economic storm, which could easily keep blowing into the next fiscal year, will result in a prolonged period of revenue problems. Analysts now predict it will take until the 2013-2014 budget year for state government revenues to surpass those received just last year -- in total, a five year recovery.

And It Could Be Worse: The report, with a nod toward the fact that no one really knows how much worse things will get, includes a scenario where personal income grows only half as much as the LAO now predicts for 2009 and 2010. The result: another $4.5 billion less in state government revenues in the short term.

Capital Gains Collapse: The outlook for capital gains revenues really helps tell the overall story. Profits on stocks and real estate are a major component of personal income tax revenues for the state, and thus a major component of government revenues. The LAO outlook now projects capital gains will decrease from $125 billion in the 2007 tax year to just $65 billion in 2008... almost a 50% drop in one year. In 2009, the LAO believes capital gains will fall to just $41 billion -- that's a 66% evaporation of capital gains revenues in just two years.

Housing, Unemployment: Two more signs of the meltdown... while more than 200,000 new residential building permits were issued in both 2004 and 2005, the annual totals this year and next are expected to only be about 70,000. Meantime, California's unemployment level was about 4.9% in 2006; by next year, the LAO believes it will be 9%... or higher.

Expenses: Lest anyone think the problem is strictly too little cash, the LAO projects an ongoing rise in state government expenses (but to be fair, the projected problems seem to be much more severe on the other side of the ledger). Some biggies -- public schools (K-12) spending to rise by 2.2% a year; Medi-Cal spending to rise by an average of 6.1% a year; in-home supportive services (IHSS) to average 7.9% more a year; and prison spending to increase an average of 2.6% a year.

But the winner... debt service. The LAO predicts payments for all of the state's borrowing through bonds will rise an average of 9.9% a year. That increase includes the bonds approved by voters just two weeks ago.

This kind of sober assessment would presumably shake up the cuts/taxes soap opera that's been playing out in the Legislature these past few years. For now, it hasn't; another leadership meeting today apparently didn't move the ball over the goal line.

Plans for a weekend budget vote in one or both houses have been scrapped... with the best case scenario now being some sort of budget action taken just before that Thanksgiving turkey gets popped into the oven.

From the "It Only Seems To Get Worse Department"... budget advisers to Governor Schwarzenegger say the cost of fighting wildfires since July now totals almost $305 million. That's about $235.8 million more than was set aside in the budget Schwarzenegger signed into law less than two months ago.

The firefighting pricetag is current as of this past weekend, and reflects not just the struggle to contain the still burning blazes... but of the state to adequately set aside money for disasters.

The official 2008-2009 budget included just $69 million for emergency fire suppression. And it seems safe to assume that just about everyone knew that wouldn't be enough, given this past summer's wildfires.

And now, for some particularly troubling context: state government spent $518.4 million on firefighting in the 2007-2008 fiscal year. That dwarfed the costs in any recent year... and yet, we've already spent more than half that amount in just the first five months of this fiscal year.

While gubernatorial advisers won't say so, it may be fair to tack the $236 million in unbudgeted firefighting costs to the already large revenue gap announced this month of $11.2 billion... thus making the problem inch ever closer to $11.5 billion. (Some in the Capitol will no doubt quibble with this fast math, arguing that it mixes a lack of revenues with an excess of expenses... others will proclaim that's a distinction without a difference.)

Schwarzenegger budget spokesman H.D. Palmer says the governor's line-item vetoes when signing the budget... totaling around $510 million in the general fund... were made with an eye toward socking away cash for just these kinds of expenses. That, of course, was before the bottom dropped out of the revenue forecasts in that budget.

You may remember Schwarzenegger pushed for a new fee in this past year's budget debate to help fight fires... a fee hike that died in the Legislature. The governor has said he intends to re-introduce the proposal in January.

Last month, when responding to a question about then-burning fires (which are part of the $305 million pricetag), the guv said the following:

"We need to raise the insurance fees, the homeowner insurance fees, by a certain extent. And, of course, there are going to be debates, is it a tax? It doesn't matter what it is. Let's increase it, let's create the extra revenues and keep people safe. Public safety is the most important thing."

update: Schwarzenegger budget guru Palmer says the cost of SoCal firefighting since just last Wednesday is now near $11.1 million... that's part of the bigger numbers mentioned above.

The big immediate news in California these last few days has been the devastating wildfires burning through the Southland. Even so, the inferno that is the state budget crisis appears ready to rekindle here in Sacramento.

The state Senate has now scheduled floor session for this coming Sunday, ostensibly for a vote on some kind of fiscal crisis solution. As you know, the state is staring down an abyss that's $11.2 billion deep in the short run. The 4:00 p.m. session was announced this afternoon, thus giving incumbent lame duck senators ample notice for their travel back to the state Capitol.

You'll remember that Sunday is the deadline mentioned by outgoing Senate President pro Tem Don Perata for legislative action before the new Legislature is seated on December 1.

The real question, of course, is whether there will be a deal in hand by week's end? It's become clear that Democrats want a list of new revenues GOP legislators are willing to raise... in exchange for a list of items they are willing to cut. And given the severity of the problem, it seems that both lists need to be substantive. And serious.

Meantime, Governor Schwarzenegger's budget office has released the latest revenue data. The report shows that October revenues were about $2 million better than expected in the analysis Schwarzenegger unveiled just 11 days ago, while the fiscal year revenues are now about $20 million worse than expected. Relatively speaking, those are small numbers. Of course, when you match up actual revenues with the projections contained in the official budget signed into law back in September... the gap is much, much larger. Hence the call for immediate action.

It would be an oversimplification to say that nothing's happened since the governor called the special session; legislative leaders have met several times, and the Assembly Budget Committee debated Schwarzenegger's proposals last week. But there's also not what you'd call a palpable buzz inside the Capitol. Instead, the odds makers would probably say the safe money is on limited action now, with more substantive issues postponed until the newbies take office next month.

Just a note to say there's no podcast this week, as I'm back east attending the annual conference of the Association of Capitol Reporters & Editors.

Back at it on Monday...

Eight days after Californians went to the polls in record numbers, there are still an awful lot of ballots left to count, and a few races that could theoretically flip in who we now think has come out on top.

As of this afternoon, a report from the Secretary of State's office showed that more than 1.8 million ballots remain uncounted across California. That includes more than 965,000 vote-by-mail ballots, almost 710,000 provisional ballots, and more than 156,000 ballots that for one reason or another weren't counted by machines on the first pass.

Not surprisingly, Los Angeles County has more uncounted ballots than anyone else -- an estimated 410,000. County elections officials are now in the post-election period where all of this final tabulation takes place, before they can send results to Sacramento for certification.

The question is whether any of these still unknown votes will sway either races for the Legislature, Congress, or for any statewide ballot measure.

The following is from the Secretary of State's official website:

In the 4th congressional district, former GOP state senator Tom McClintock leads Democrat Charlie Brown by 928 votes (though some claim McClintock's lead has grown).

In the 10th Assembly district, Republican Jack Sieglock leads Democrat Alyson Huber by 614 votes.

And in the 19th state Senate district, Democrat Hannah-Beth Jackson leads Republican Tony Strickland by 1203 votes.

Meantime, supporters and opponents of Proposition 11, the redistricting measure, continue to watch the proposal cling to what looks like a narrow victory. There are almost 154,000 more yes votes on Prop 11 at this point, out of almost 10.3 million votes counted. Some analysts claimed this afternoon that the final outcome will stay the same.

All of this is just another reminder that while your part in an election may take a matter of minutes (or hours, with last week's long lines); but the work of elections officials begins much earlier... and ends much later.

No, you didn't read that headline incorrectly.

This morning's report by Legislative Analyst Mac Taylor finds a state budget meltdown that certainly would rank among the very worst ever seen, if the numbers hold up: an almost $28 billion shortfall in revenues over the next 18 months, and... perhaps even more stunning... annual shortfalls in the range of $22 billion after that.

Granted, these are only projections and they do not account for the implementation of solutions. Still, the estimates are almost certainly going to cause a dramatic increase in tensions inside the Capitol, both during the lame duck special session and once the new Legislature convenes next month.

This is the first official report produced under new analyst Taylor, and it's a doozy.

"The state's revenue collapse is so dramatic and the underlying economic factors are so weak that we forecast huge budget shortfalls," says the opening summary of the report.

The LAO agrees for the most part with the recent analysis of Governor Schwarzenegger's finance team (though they feel the immediate gap is slightly larger), and finds his proposals for both tax increases and spending cuts "balanced."

The report also finds a worsening situation on the spending side of the state budget ledger. Chief among these is a loss of approximtely $1.5 billion in property tax revenues over the course of three fiscal years -- thus increasing state government's responsibility to funding public education. Tacked on to that are unexpectedly high caseloads in social services programs; the still lingering cost of fighting recent wildfires across California; and... not surprising to nonpartisan budget watchers... a lack of actual savings from so-called "unallocated" spending reductions penciled in to make previous budgets balance.

There's much more in the report, which will be discussed by Taylor at an afternoon news conference. And it will no doubt be the shot heard 'round the Capitol this morning... an affirmation that the challenge that lies ahead is unlike any other legislators or the governor have faced.

In the immortal words of Bette Davis: "Fasten your seatbelts. It's going to be a bumpy night."

The one thing that seems clear in the wake of last week's approval of Proposition 8 is that the emotional issue isn't going away anytime soon. And to understand the murkiness of what should, or shouldn't, happen... look no further than Governor Schwarzenegger.

In an interview with CNN this weekend, the governor called the passage of Prop 8 "unfortunate" and predicted the proposal may ultimately fail in the courts. "We will maybe undo that," he said, "if the court is willing to do that... and then lead in that area."

A casual observer could be forgiven if left with the impression that Schwarzenegger is strongly pro-gay marriage. On the contrary, his position... at times confusing and perhaps symbolic of the conflicted feelings of many... has been hard to pin down over the years.

The only way to describe his stance may be this: a personal opposition to same sex unions, but a professional laissez faire approach.

Consider the careful line Schwarzenegger walked in the winter of 2004, when San Francisco Mayor Gavin Newsom began issuing same-sex marriage licenses. In condemning the action, the governor focused on Newsom... not the issue itself.

But at the same time, he was using verbage that sounded much more like an endorsement of a legal ban. Consider his official statement in the wake of Newsom's action: "Californians spoke on the issue of same-sex-marriage [Proposition 22, the 2000 initiative defining the state's view of marriage]. I support that law and encourage San Francisco officials to obey that law."

Still, it was always unclear who Schwarzenegger thought should have the final say. Appearing on The Tonight Show in May 2004, the governor said, "Let the court decide." But he then quickly added: "Let the people decide."

That same month, he told the editorial board of the San Francisco Chronicle: "When the people vote, people are not legal experts, constitutional experts or any of that," he said. "I think that's why we have the courts."

A few months later, in an interview with me in his Capitol office, Schwarzenegger again seemed ambivalent. "It's a decision made by the people," he said. He then hesitated for a moment, adding: "And by the courts... I support whatever the law is."

Schwarzenegger would later veto multiple legislative attempts to legalize gay marriages, saying only the courts could overturn an initiative like Prop 22.

When Prop 8 made its way onto the ballot, the governor made headlines for telling a group of gay Republicans he not only opposed it... but "will always be there to fight against that."

Many took that as a sign Schwarzenegger would actively campaign against Prop 8. He furthered such speculation in an interview with KCRA-TV in Sacramento this past May. "I defnitely will be actively speaking out against it," he said.

But in the same interview, in response to the state Supreme Court's ruling legalizing gay marriages, the governor said this: "I never wanted to overturn the will of the people [in Prop 22]."

As we now know, Schwarzenegger was all but invisible on Prop 8 this fall, with only his image appearing in a final TV ad appeal by the opposition.

The governor's path through the political minefield over gay marriage doesn't offer much guidance for others. He will no doubt be asked to clarify his position in the days and weeks ahead, now that legal challenges to Prop 8 are underway, and opponents of the ban are taking to the streets in ever growing numbers. And the issue presents enormous political challenges for the moderate Republican governor. After all, the vote was very close. And the issue could bleed into other policy debates in 2009 with both parties... just consider his need to forge some kind of compromise with the conservative wing of the state GOP over California's ever worsening fiscal climate.

On this week's Capital Notes Podcast, a look back at the good, the bad, the... you know... of Election 2008. From ballot measures to legislative races and the Obama Effect, Capitol Weekly editor Anthony York and I recap some of what happened, what it might mean, and what's next.

The current and incoming leaders of the Senate said today that state government faces an $11.2 billion gap between revenues and expenditures in the fiscal year that began just four months ago.

That figure, according to Senate President pro Tem Don Perata, is from the budget team of Governor Schwarzenegger. The governor is slated to make his own official announcement tomorrow; a budget spokesman for the guv said today he couldn't comment on the deficit estimate.

Perata and his successor, Sen. Darrell Steinberg (D-Sacramento), told Capitol reporters that two tax ideas should be on the table when the lame duck Legislature reconvenes under the special session proclamation Schwarzenegger will sign tomorrow.

Neither idea is new. The lesser of the two... both in criticism and fiscal value... is a new tax on oil production in California. The oil severance tax has come up twice in recent times: as part of the ill-fated Proposition 87 in 2006 and as a legislative proposal killed earlier this year by Assembly Republicans.

The second one... well, this one you've heard of. Democrats say that the dire situation demands a repeal of Schwarzenegger's 2003 permanent cut in the vehicle license fee, the infamous "car tax" that he rode into office during that year's recall election. VLF revenues used to go directly to local governments, but the state has been making up the lost revenue for years. Reversing the governor's VLF rollback wouldn't be easy, thanks to a complex system now controlling this flow of money.

The two Senate leaders said today, though, that it's a fight worth having.

"No one likes taxes," said pro tem-in waiting Steinberg "But we have an obligation to fully fund public education, and to fund infrastructure, and to make progess on health care."

The Democrats say the value of the two tax increases would be about $7 billion... but there's a catch: that's how much the tax hike would bring in for a full fiscal year, and remember, we'll be almost five months into the current one by the time legislators reconvene here at the state Capitol.

In other words, even raising these two taxes would still require a lot of other tough choices in order to get to $11.2 billion worth of solutions.