Budget axes swinging across California

A San Francisco Municipal Railway train drops off passengers in a San Francisco, California neighborhood March 1, 2010.

SAN FRANCISCO (Reuters) - As California officials grapple with closing a $20 billion state budget gap, their local counterparts fear cuts in state financial aid -- just as they slash spending to tackle budget woes of their own.

Budget axes are swinging across the most populous U.S. state, as the Great Recession has tightened its grip and triggered a revenue slump. Officials are not only trying to balance local spending plans, but also trying to ease concerns of rating agencies.

Credit rating agencies have been increasingly aggressive in probing local finances and are growing concerned about those in California, where sales and property taxes are expected to continue to slide, opening shortfalls and forcing even the most prudent of local governments to raid and potentially exhaust reserves.

"There are a lot of challenges ahead," said Amy Doppelt, a Fitch Ratings managing director.

California's local governments have used up the least painful of budget options and now must make difficult choices, almost surely centered on spending cuts, Doppelt added.

"For many municipalities in California we're at a point where cuts will impact service delivery," she said, noting they may not be enough to stave off warnings on credit ratings.

Downgrades may follow if reserves are drawn down sharply, raising the borrowing costs of local governments and adding to financial strain.

Fitch last month, for instance, lowered its outlook on all San Francisco bonds to "negative" from "stable." The city's general obligation debt held on to its AA-minus rating but Fitch cited concerns about projected budget gaps in future years and projected low reserves by the end of fiscal 2010.

To address the city's $522 million budget gap, Mayor Gavin Newsom plans to send layoff notices to more than 15,000 city employees this week. Most will be able to be rehired but will work fewer hours each week, translating into a 6.25 percent pay cut. San Francisco should see $100 million in savings.

BEYOND CITY HALL

The fallout from weak consumer spending amid double-digit unemployment, a sluggish housing market and declining property values has been cruel for local officials well beyond those in city halls.

San Francisco's transit agency faces a $100 million budget gap over the next two years. Officials are seeking layoffs to pare costs but riders expect fare hikes to help cover the $108,295 average annual compensation for drivers, which compares with the $61,021 state median household income, according to California's Finance Department.

"It's getting so expensive that right now I try to get rides as much as possible," said Sarah Gilson, a 26-year-old lawyer.

San Francisco's school district also is awash in red ink. It faces a $113 million budget gap over the next two years.

The Los Angeles Unified School District is in even more dire financial straits. It must close a $640 million budget gap for its next fiscal year -- even after cutting, reallocating or delaying $1.5 billion in spending over the past two years.

To close its deficit, officials in Los Angeles, the second biggest U.S. public school district, on Tuesday approved layoffs for nearly 5,200 teachers and other school staff. Last year the district sacked 2,000 employees.

Meanwhile, Los Angeles officials are seeking to pare 4,000 positions from the city's' payroll to help close next year's expected $484 million budget gap next. Mayor Antonio Villaraigosa said on Tuesday job cuts backed by the city council would result in at least 2,000 layoffs.

Standard & Poor's last month cut its rating on Los Angeles' general obligation debt by a notch to AA-minus with a stable outlook, citing concerns that reserve funds could be drained.

Steven Frates, director of research at the Davenport Institute at Pepperdine University, expects rating agencies to be busy this year putting out anxious notes on local bond issuers in California that had over the past two decades been especially generous with their employee compensation.

"Now that cost is coming home to roost," said Frates, a state and local government specialist.

But he added, "Everybody is hurting. ... The picture has not been good by any means statewide and probably won't get better until the economy improves."

That may take some time. California's average annual unemployment rate last year was a bleak 11.4 percent, compared with 7.2 percent in 2008, according to the U.S. Bureau of Labor Statistics.

(Additional reporting by Steve Gorman in Los Angeles; Editing by Leslie Adler)