Last May, Elizabeth Hill, the nonpartisan legislative analyst, warned that the state budget proposed by Gov. Arnold Schwarzenegger earlier that month (a revised version of the plan he first laid out in January) relied on “overly optimistic” assumptions about revenue.

In particular, Hill forecast a decline in property taxes – due to the extended housing crisis – along with an expected shortage of money for the remainder of the current state fiscal year (which began July 1, 2007) and the next.

By late summer, the Schwarzenegger administration began work on the 2008-09 budget, projecting an “operating deficit” – the difference between spending commitments and expected revenues – of $6.1 billion.

In November Hill, citing a California economy now struggling to cope with the full effect of the housing crisis, upped the ante, saying that deficit would likely reach almost $10 billion over the next year and a half.

And then, in early December, word leaked out that the administration expected the gap to be in the range of $14 billion or more.

Is the state’s financial situation unraveling that quickly – and if so, why?

Economists say we have been hit by a double whammy thanks to the housing crisis – a reversal of the appreciation rates which pushed California home prices up more quickly than those in other states, and record foreclosures of homes purchased through sub-prime or other shaky loans offered to people no longer able to make their mortgage payments.

We should have a clearer picture of what that really means when the governor submits a new budget proposal to the Legislature on Jan. 10.

In the meantime, Schwarzenegger has announced he would declare a “fiscal emergency” next month, a move that may enable the administration and the Legislature to address the budget deficit more quickly than usual.

The governor has also instructed state agencies to propose 10-percent, across-the-board spending cuts.

While I appreciate the sentiment, $14 billion is more than 12 percent of the state’s general fund budget. In addition, a majority of state spending is mandated by voter-approved initiatives or federal laws over which we have little or no control.

Some Republican lawmakers say we may need to cut from programs and services taking up the lion’s share of state spending – K-12 education and higher education, health and human services, transportation and public safety.

We cannot cut our way out of a $14 billion deficit: reductions of that magnitude would have a devastating impact on kids, the elderly and the disabled – something most of us would oppose.

We need to increase revenues, too, because we’re not just talking about the cost of programs and services here. The deficit includes repayment of bond debts – debts which have increased significantly in recent years.

In 2003, former Gov. Gray Davis, also facing a significant budget gap, restored vehicle license fees to where they were under his predecessor, Pete Wilson.

Critics attacked Davis for increasing the “car tax,” and those attacks no doubt contributed to his defeat in the recall election later that year.

In his first action as the new governor, Schwarzenegger fulfilled a campaign promise to roll the vehicle license fee back again – politically popular but not the wisest policy decision. By rolling back the fees, he helped drill a $6 billion hole in the state budget.

I bring this up not to assign blame, but to highlight the fact that the budget deficit has many contributing causes – and there is no easy fix.

The legislative analyst has suggested we eliminate some recently-established state programs, abolish tax breaks, raise taxes and reduce benefits for people who rely on government programs.

I am not ready to endorse any particular strategy just yet, but I think it is imperative that we keep all of the options on the table and that we prioritize to protect the most vulnerable among us.

That includes thinking long and hard as we also pursue health care reform.

On Dec. 17, the Assembly approved a bill (the product of negotiations between Schwarzenegger and Speaker Fabian Nunez) to cover more Californians with health insurance.

I want health care reform, too, but I support Senate Leader Don Perata’s decision to delay Senate action on the plan until January – and until the legislative analyst has had a chance to estimate whether implementation of the Schwarzenegger-Nunez bill might further strain the state budget.

“It would be imprudent and impolitic,” Perata said, “to support an expansion of health care coverage without knowing how we’re going to pay for vital health programs the state now provides for poor children, their families and the aged, blind and disabled.”

I agree.

Patricia Wiggins (D-Santa Rosa) represents California’s 2nd Senate District, which includes portions or all of six counties – Humboldt, Lake, Mendocino, Napa, Solano and Sonoma. Visit her Web site at http://dist02.casen.govoffice.com/.