California lawmakers to vote on budget deal

By Jim Christie

SAN FRANCISCO (Reuters) - California lawmakers will vote as soon as Monday afternoon on a two-month late state budget compromise that avoids raising taxes or cutting more spending for this year, and which sets the stage for another budget shortfall next year, aides said.

State lawmakers agreed the deal over the weekend after a Field Poll of California voters last week reported an all-time low approval rating for the legislature, where majority Democrats and minority Republicans had been locked in a record-long stalemate over a budget for the state's current fiscal year, which began July 1.

"We're going to be back to a budget stalemate next summer," said Jack Pitney, professor of government at Claremont McKenna College. He expects lawmakers put off difficult decisions about either raising revenues or restraining spending.

"The legislature really hasn't done much to address the structural imbalance of the budget and the state's unstable revenue sources will persist until the legislature fixes it," he said.

Legislative aides said the agreement will close a budget shortfall estimated by Gov. Arnold Schwarzenegger at $17.2 billion, which would include a $2 billion reserve, without any new taxes, a proviso Republican lawmakers had demanded.

The deal calls for no additional spending cuts beyond those previously agreed to by Democrats. Revenues they had sought to fill the shortfall will be raised by scrapping some tax deductions as well as from accelerated tax payments.

Additional details were not immediately available. Aides to Schwarzenegger, who was not involved in crafting the agreement, said the celebrity Republican governor is reviewing it.

On the municipal debt market, volatility on Wall Street eclipsed the budget deal, typically a closely watched development as California is the nation's biggest issuer of municipal debt.

Lehman Brothers Holdings Inc is seeking bankruptcy protection and Merrill Lynch & Co Inc has agreed to be bought by Bank of America Corp amid concerns it could fall victim to the fallout from bad real estate assets and the credit crisis.

"All the focus so far today is on what's happening with the big investment banks, but any resolution is a good thing," said Parker Colvin, head of municipal trading and underwriting at Stone & Youngberg.

Others reserved judgment on the agreement pending the release of its details -- especially any details of how the state's spending and revenues may be more closely matched.

California officials are routinely criticized on Wall Street for year in and year out failing to tackle the state's so-called "structural" budget imbalance, which leaves them facing budget shortfalls.

That failure is raising the state's borrowing costs by holding down its credit rating. Standard & Poor's and Fitch Ratings have 'A+' ratings on California's general obligation debt and Moody's Investors Service rates the debt 'A1.'

"My understanding is the structural deficit is still not solved ... We'll be taking a close look at that," said David Hitchcock, a senior director of public finance ratings at Standard & Poor's.

(Editing by Diane Craft)