September 29, 2010 / 8:06 PM / 7 years ago

New delay hits faith in California budget deal

SACRAMENTO, California (Reuters) - California's leaders will not meet on Wednesday to press on with talks to reach an agreement on a state budget, raising concerns that a deal on a spending plan may not be as near as indicated.

California is in its 91st day without a state budget in place, a record for the government of the most populous U.S. state, which is notorious for lengthy stalemates over spending plans and is in the middle of a divisive election year.

California also is the biggest issuer of bonds in the U.S. municipal debt market and investors who have been patient thus far with its budget stalemate are getting concerned.

They rank second in terms of California's payment priorities should the state be forced to issue IOUs pending a budget agreement but prefer the state put its financial affairs in order and not take that dramatic step again. California last year during a budget standoff temporarily issued IOUs to preserve cash to pay investors holding its debt.

Aides to Governor Arnold Schwarzenegger and a top lawmaker involved in budget negotiations said talks would be suspended for a second consecutive day for staff to work through details of a "framework" for a spending plan agreed upon last week.

The aides added that talks to reach a deal on balancing the state's books, which requires closing a $19.1 billion deficit, would resume on Thursday -- a week after the announcement of the framework, which was supposed to have set the course for an agreement on Monday.

But on Monday evening State Senate President Pro Tem Darrell Steinberg said there was no deal, although he expressed confidence one was around the corner so the full legislature might be able to vote on it next week.

If claims of a deal being near begin to ring false, investor confidence may falter, said Craig Brothers, a portfolio manager at Bel Air Investment Advisors in Los Angeles.

"It looks like they said they had a framework just to buy themselves more time," Brothers said. "I think there is cause to question it."

"If you go into next week and it's back into the old vacuum of information, ultimately I think that will cost them," Brothers said.

The cost to California may be the risk of a cut to its already low credit rating, said Howard Cure, director of municipal research at Evercore Wealth Management.

California's leaders may be trying the patience of credit rating analysts, Cure said: "It gets people wondering, 'What's the next step?'"

ELECTION DAY APPROACHES

The election cycle may also trigger doubts in the muni market about budget talks, Cure said: "I've seen it come into play where it just paralyzes other state governments."

If talks drag on into mid-October, they will be at the doorstep of the November election -- in a particularly volatile election year.

California's top state race is the one for governor, with Democrat and Attorney General Jerry Brown squaring off against Republican Meg Whitman, the former chief executive of eBay Inc. Schwarzenegger can not run again because of term limits.

"It could muddy the waters and make the deal a little harder," Brothers said, adding that either Brown or Whitman shortly after election day must begin preparing a spending plan for California's next fiscal year.

That will not be easy. California has been contending with a sharp downturn in revenue in recent years because so much wealth in the state has evaporated as a result of the mortgage crisis, housing meltdown, the stock market's roller-coaster ride and one of the highest unemployment rates in the nation.

Schwarzenegger has urged addressing the revenue slide with deep spending cuts and no tax increases, an approach embraced by the fellow Republicans in the legislature's minority. Democrats who control the legislature have proposed spending cuts as well, but they want to raise revenue with some tax increases and by delaying corporate tax breaks.

Complicating budget talks is Schwarzenegger's insistence that any agreement on a spending plan also include a deal on reforms to the state's public pension system that reduce its burden on the state's general fund. He is urging higher retirement ages and reduced benefits for new public employees, which public-sector unions allied with Democrats oppose.

Additional reporting by Ida Lieszkovszky; Editing by James Dalgleish

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