Emergency measure planned for California budget

SAN FRANCISCO (Reuters) - California Gov. Arnold Schwarzenegger said on Friday he would declare a "fiscal emergency" as he had previously signaled to force lawmakers to tackle an estimated $3.3 billion state budget shortfall for the current fiscal year.

Schwarzenegger said in a statement that the official announcement to impose a special legislative session will take place with the release next month of his budget plan for California's next fiscal year.

Declaration of a fiscal emergency would allow the Republican governor to seek authority from California's Democrat-led legislature for spending cuts in the middle of the state's current fiscal year to balance the budget and to bolster the next fiscal year.

California's budget watchdog agency recently forecast a $10 billion shortfall forming over the next 18 months as the state's housing downturn slows revenue growth.

"I have briefed each of the legislative leaders on our projected budget shortfall, and I believe that when the legislature reconvenes in January immediate action is necessary," Schwarzenegger said in his statement.

"I will continue my discussions with the leaders in the coming weeks, so that we can narrow as many differences as possible and move quickly in the special session to bring this year's budget back into balance," he added.

California's shortfall in the current fiscal year reflects lower revenues caused by the housing slump and mortgage turmoil, property tax collections that missed expectations, increased firefighting costs related to recent wildfires in Southern California, and legal challenges delaying Indian gambling compacts intended to provide the state with a share of casino revenues.

Schwarzenegger signaled that tax increases would be off the table in talks with lawmakers as a way to close the state's budget shortfall. He has opposed tax hikes in the past, in sharp contrast with Democrats in the legislature who have, meanwhile, fought his plans to restrain or cut spending.

Analysts had expected the battle lines to be redrawn even without concern over a budget shortfall in the state capital of Sacramento. But the annual budget brawl may take on added urgency with California's housing downturn causing trouble for the state's broader economy and with Schwarzenegger mulling across-the-board spending cuts, according to reports.

"Just like we don't know where the bottom is for the housing market, we don't know where the bottom is for the revenue slowdown," said economist Steve Levy of the Center for the Continuing Study of the California Economy in Palo Alto.

After Schwarzenegger last week raised the prospect of declaring a fiscal emergency, Wall Street credit rating analysts said it could only help to focus officials on the state's finances.

Analysts have long urged state officials to either raise taxes or cut spending, or both, to keep the books balanced. California's persistent budget shortfalls are holding back its credit rating. Higher ratings would lower borrowing costs for the state, a major U.S. issuer of public debt.

(Reporting by Jim Christie; Editing by Leslie Adler)