UPDATE 2-Schwarzenegger declares California fiscal emergency

Wed Jul 28, 2010 5:54pm EDT

(Adds details, background, comments, byline)

By Jim Christie

SAN FRANCISCO, July 28 (Reuters) - California Governor Arnold Schwarzenegger declared a state of emergency over the state's finances on Wednesday, raising pressure on lawmakers to negotiate a state budget that is more than a month overdue and will need to close a $19 billion shortfall.

The deficit is 22 percent of the $85 billion general fund budget the governor signed last July for the fiscal year that ended in June, highlighting how the steep drop in California's revenue due to recession, the housing slump, financial market turmoil and high unemployment have slashed its all-important personal income tax collection.

In the declaration, Schwarzenegger ordered three days off without pay per month beginning in August for tens of thousands of state employees to preserve the state's cash to pay its debt, and for essential services.

California's budget is five weeks overdue, joining New York among big states with spending plans yet to be approved, and Schwarzenegger and top lawmakers are at an impasse over how to balance the state's books.

Analysts say it could be several more weeks before the Republican governor and leaders of the Democrat-led legislature reach an agreement, a delay that threatens to lower the state's already weak credit rating, now hovering just a few notches above "junk" status.

"Without a budget in place that addresses our $19 billion budget deficit, every day of delay brings California closer to a fiscal meltdown," Schwarzenegger said in a statement.

"Our cash situation leaves me no choice but to once again furlough state workers until the legislature produces a budget I can sign," he wrote.

Schwarzenegger's declaration noted the state's government is projected to run out of cash no later than October should its budget stalemate persist, as expected.

California has a long history of nasty and lengthy budget battles.

Last year, the fight over a spending plan dragged on so long the state controller had to issue IOUs instead of payments to vendors to conserve money for priority payments, including payments for education programs and for investors holding the state's bonds.

IOUs AS EARLY AS NEXT MONTH

Schwarzenegger's declaration noted State Controller John Chiang has said he could be forced to issue IOUs as early as next month because of the budget impasse.

Schwarzenegger has proposed slashing spending to balance the state's books, an approach rejected by Democratic lawmakers. Their leaders in the state Senate and Assembly are trying to draft a joint plan likely to include proposals for tax increases to rival the governor's budget plan.

By ordering furloughs, which he also did last year, Schwarzenegger is bringing pressure on state employee unions allied with Democratic lawmakers on the heels of losing a courtroom battle to cut state employees' pay to the federal minimum wage to bolster the state's finances.

Schwarzenegger's new furlough order was instantly condemned by labor officials as a political ploy.

"To once again force state employees to take unpaid furloughs is just another punitive measure by Governor Schwarzenegger because he couldn't impose minimum wage," said Patty Velez, president of the California Association of Professional Scientists.

The declaration exempted state employee bargaining units that recently agreed with Schwarzenegger's administration to new contracts that include reduced pension benefits.

Schwarzenegger has said he will only sign a budget agreement if it includes an overhaul of the state's public pension system, which includes the California Public Employees' Retirement System, the biggest U.S. public pension fund, which he says poses one of California's greatest financial challenges going forward.

Schwarzenegger clearly has no qualms in the final months of his final term about pressuring lawmakers through the wallets of one their top constituencies, said Pete Peterson, executive director at the Davenport Institute at Pepperdine University's School of Public Policy.

"It's an indirect play," he said. " ... these past few months there has been a much more confrontational relationship between the governor and the unions." (Editing by Todd Eastham)

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Comments (36)
Robtemery wrote:
Alas the subsidies for renewable energy continue and 11-20 billion dollars/year of social services for Illegals continue with more on the way.

Jul 28, 2010 5:28pm EDT  --  Report as abuse
banger909 wrote:
Calf. is eat up by illegal immigrants I do not care how you spin or deny it illegal immigrants drain money. Oh sure they pay sales tax but the do not pay state income , or federal income tax’s which pay for schools etc. They drain and drain and put so little back. If you think this some kind of racist ranting just look at what is happening,I wish I could feel sorry for Calf. but they have done it to them self’s. Sooner or later as more and more legal residents are laid off as more and more are furloughed as more and more see there tax’s go up as their services are cut more and more it will come to a head and it will not be pretty if you think i am wrong just watch the mid terms

Jul 28, 2010 5:42pm EDT  --  Report as abuse
deftdrummer wrote:
It’s all about Prop 19 people! California can either pave the way for lessons in debt or we can pave the way in fiscal and social responsibility! Legalize the green, jobs for everyone!

Jul 28, 2010 5:44pm EDT  --  Report as abuse
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