The state budget crisis has been quiet for the past few months but will return to center stage this week as Gov. Arnold Schwarzenegger prepares to belt out some bad news.

Governor Arnold Schwarzenegger didn't see the federal funds he hoped for. (Jed Jacobsohn / Getty Images)

The governor is scheduled to release an updated budget plan Friday that will probably include even deeper cuts than those he proposed in January, when he called for reductions in health and human services, prisons, education and state worker pay, among other areas.

Unexpected gains in state revenues that leaders hoped would significantly cut the deficit evaporated in the last few weeks. State Controller John Chiang reported Friday that revenues coming into state coffers from personal and corporate taxes fell $3.6 billion short of what was projected in April, the month when the bulk of revenues are collected.

That means the state's budget deficit, which started the year at $20 billion and dipped to about $18.6 billion after some midyear actions by the Legislature, could exceed the original estimate.

"One thing is for certain, not only the governor but the Legislature too is going to have to confront some difficult decisions in the coming weeks in closing this gap," said H.D. Palmer, spokesman for the state Department of Finance.

Losses carry over

State financial analysts are pointing to a significant carryover of losses from 2008 to 2009 that brought down revenues from capital gains and weakness in small business income to explain the shortfall. Some people, including state Senate President Pro Tem Darrell Steinberg, D-Sacramento, had hoped that gains in revenues from the first few months of the year would push the deficit for the 2010-11 fiscal year below $10 billion.

State leaders also hoped for billions in aid from the federal government. The governor had included $6.9 billion in federal dollars in his January budget plan, but so far the state has received just under $3 billion, according to the Finance Department.

Schwarzenegger also had counted on $140 million in proceeds from a lease for an oil drilling project off the Santa Barbara coast that would fund state parks. But last week the governor dropped his support for the proposal after the huge oil spill in the Gulf of Mexico. It is not clear how the governor plans to pay for parks now.

Both Democratic and Republican leaders in the Legislature have said they do not intend to seek higher taxes this year to bridge the gap.

All of that leaves lawmakers and the governor facing decisions such as the wholesale elimination of certain programs for children, the poor and the disabled.

The governor promised earlier in the year to spare education. He proposed an increase in funding for higher education while calling for a controversial $2 billion cut to K-12 schools that he said was consistent with the voter-approved initiative that determines education funding in California. Keeping the increase to higher education could prove tough given the deficit.

"Basically, the Legislature and the governor are faced with solutions that are largely going to be distasteful. They're going to hurt somebody either in their pocketbook or in the level of services they are receiving," said Michael Cohen, deputy analyst for the California Legislative Analyst's Office.

Deficit needs action

Cohen said that a deficit of this magnitude needs to be addressed with cuts and new revenues, such as taxes or fees.

The state Constitution requires two-thirds approval by the Legislature to pass a budget and any new taxes, giving Republicans, who have steadfastly opposed new taxes the power to block them.

Jean Ross, executive director of the California Budget Project, a public policy think tank that advocates for low-income Californians, also said leaders need to increase revenues as part of the budget solution. She said she thinks solving the deficit this year will be tougher than last year because leaders already have used up most of their options.

"I think we're likely to see some very harsh spending reductions that, if implemented, will have a long-term impact on the state's economy and a very significant impact on California families," Ross said.