California budget vote hits delays

SAN FRANCISCO (Reuters) - A California budget deal that would at least temporarily avert a financial collapse of the most populous U.S. state hit delays on Thursday, although legislative leaders still hoped lawmakers would pass the plan.

The agreement by Governor Arnold Schwarzenegger and Republican and Democratic leaders would close a $26 billion budget gap, but some rank and file legislators raised objections to some of the deep spending cuts in the plan.

Approval cannot come soon enough for the state, said Standard & Poor's analyst Gabriel Petek because the recession's tight grip on California's economy, which would rank as the world's eighth largest economy were the state a country, has sent tax collections tumbling.

California's economy also is grappling with record unemployment and a mortgage crisis deeper than other states. If the deal fails to pass, S&P is ready to cut the state's credit rating a notch closer to junk, joining Fitch Ratings and Moody's Investors Service.

The state government also needs a balanced budget to return to capital markets and quit issuing IOUs preventing it from running out of cash.

The state controller on July 2 began sending the IOUs to taxpayers owed refunds and to vendors to hold on to the state's dwindling cash for priority payments, including debt servicing payments to investors holding the state's bonds.

Schwarzenegger, a Republican, and top lawmakers in the Democrat-led legislature with their agreement on Monday ended weeks of talks over how to balance the state government's budget in the face of its cash crisis and revenue slump.

They agreed to more than $15 billion in spending cuts, shifting funds, borrowing and taking money from local governments to balance the budget for the fiscal year that began on July 1. Tax increases were not part of the deal.

The state Senate was set to vote on the agreement to close the massive budget gap late on Thursday. The Assembly had yet to schedule its vote, which some legislative aides said may not happen until Friday.

Democrats were under pressure to oppose parts of the agreement. State party chairman John Burton urged them to vote down a provision allowing more oil drilling.

"This Republican offshore drilling scheme endangers California's environment. It would further pad the pockets of oil executives. And it does virtually nothing to solve the state's current or future budget problems," Burton said.

READYING FOR DEBT SALE

Once Schwarzenegger signs the budget into law his finance department will press ahead with its analysis of the state government's cash flow, which the state treasurer and controller need to decide which kind of short-term debt, and how much of it, the state will need to sell in coming weeks.

Plans are under way in the state capital of Sacramento to sell either revenue anticipation notes or revenue anticipation warrants to raise money to bolster the state's cash account. Analysts expect it to remain under pressure from weak revenues.

Record unemployment is slashing revenues from personal income taxes, the state's biggest revenue source. They are suffering their worst decline since the Great Depression and many analysts expect weak collections until payrolls expand with an economic recovery.

California's jobless rate in June was unchanged from May at 11.6 percent, its highest level in modern California records, and up from 7.1 percent a year earlier.

California's economic woes, the state government's revenue downturn and lengthy budget talks combined to raise concerns at Wall Street credit rating agencies, which have signaled the state should expect higher borrowing costs.

Fitch on July 6 cut its rating on California's long-term general obligation bonds to BBB, or two notches above junk status, and kept the debt on watch for additional downgrades.

Moody's last week cut its rating on about $72 billion of the state's general obligation debt by two notches to Baa1, or three notches above speculative status, and said the rating could suffer further downgrades.

(Reporting by Jim Christie; editing by Carol Bishopric)