RPT-UPDATE 1-California rejects budget fix, fiscal future cloudy

Thu May 21, 2009 11:20am EDT

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By Jim Christie

SAN FRANCISCO May 20 (Reuters) - Hard-hit California faces new, deep cuts in education and thousands of state layoffs after voters soundly defeated ballot measures to bolster the state's finances, leaving Gov. Arnold Schwarzenegger and lawmakers with a budget gap of more than $21 billion.

Already struggling with double-digit unemployment and a housing crisis, Schwarzenegger had promised cuts and new short-term borrowing if the measures failed, although prospects for going forward with the debt are unclear.

More than 60 percent of voters rejected five fiscal measures on the ballot in Tuesday's special election. A sixth measure barring pay raises for state officials amid deficits was approved by about 74 percent of voters.

Voters used Tuesday's election to rebuke the governor and lawmakers, whose job approval ratings are at record lows, according to the latest Field Poll. "They were sending a message of anger," said Field Poll director Mark DiCamillo.

Surveys in recent weeks had found little support for the fiscal measures, and Schwarzenegger all but conceded defeat by joining President Barack Obama in Washington on Tuesday for his announcement on auto emission rules instead of campaigning for the measures through election day.

"Now we must move forward from this point to begin to address our fiscal crisis with constructive solutions," Schwarzenegger said in a statement.

State Senate President Pro Tem Darrell Steinberg said lawmakers will need to craft a lean budget as soon as possible. "The voters have spoken and they are telling us that government should do the best it can with the money it has," he said.

Dire warnings of fiscal calamity by Schwarzenegger and echoed by top lawmakers failed to sway voters, who said they disliked the specifics in the measures -- including a spending cap, extending tax increases, borrowing against lottery revenues and tapping dedicated funds.

Outside a polling place in Oakland, California on Tuesday, John Brockage said he had lost faith in the state's leaders and could not back the fiscal measures. "We have a dope for a governor and the legislature is completely incompetent," he said. "I voted 'no' on all of them."

DEEP SPENDING CUTS CERTAIN

Voters left unanswered how Schwarzenegger and lawmakers should address the state's weakening finances.

Last week Schwarzenegger said the government of the most populous state in the United States faced a shortfall of $15.4 billion for its next fiscal year even if the fiscal measures were approved -- underscoring the severe downturn in state revenue amid recession and double-digit unemployment.

Without voter approval for the measures, California would face a $21.3 billion deficit, according to Schwarzenegger, who with the state's Democrat-led legislature put the measures to voters as part of a February budget compromise to close a nearly $42 billion shortfall through June 2010.

Tuesday's election results will likely be seen by state officials as a rejection of tax increases to close the budget gap, and they may resort to deep spending cuts, which voters may regret, analysts said.

"The public is under the delusion that they can have everything -- potholes filled, new freeways, a good education system -- but they aren't willing to pay for it ... A lot of critical services are going to be cut and there will be serious consequences," said Jim Hawley of the Elfenworks Center for the Study of Fiduciary Capitalism at St. Mary's College of California.

Schwarzenegger last week said 5,000 layoff notices would be sent to state employees, and spending cuts could fall hard on education. That stunned teachers whose school districts are already under financial pressure as their revenue shrinks.

"I'm actually a little bit nervous," said Ashley Hodge, 25, a teacher from Sonora, California. "We need supplies ... and the school is getting ready to do a second round of layoffs."

Schwarzenegger also said California would sell a $6 billion revenue anticipation warrant to raise cash. But that may be difficult because such "short-term debt has to be paid back before the state is out of the woods," said Paul Rosenstiel of investment bank De La Rosa & Co.

Washington could backstop that debt to ease investors' concerns about California's finances, according to State Treasurer Bill Lockyer. Last week he urged U.S. Treasury Secretary Timothy Geithner to extend debt guarantees through the $700 billion Troubled Asset Relief Program to states and local governments to help them borrow short-term funds.

California is in such a bind it may also need a cash rescue by Washington, said Daniel Mitchell of the University of California Los Angeles's School of Public Affairs: "If we got what they've already thrown at the auto industry, that would solve our problems for the next year or two." (Reporting by Jim Christie; Additional reporting by Ciara Linnane in New York and Braden Reddall in Sacramento, California, Editing by Chizu Nomiyama)

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