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California revised budget plan relies on cuts, taxes
May 14, 2012 / 6:32 PM / in 5 years

California revised budget plan relies on cuts, taxes

SAN FRANCISCO (Reuters) - California Governor Jerry Brown on Monday unveiled a revised state budget plan that calls for new cuts to healthcare for the poor and elderly and reduced work hours for state employees as part of an effort to close a $15.7 billion budget gap.

California Governor Jerry Brown speaks in front of a California flag in Long Beach, California March 14, 2012. REUTERS/Lucy Nicholson

Brown had said on Saturday that the projected deficit for the fiscal year beginning in July had increased from the $9.2 billion projected in January due to a weaker-than-expected economic recovery, less revenue and other factors.

The new budget counts on voters approving a November ballot initiative to raise sales taxes as well as income taxes on wealthy residents. The plan calls for $8.5 billion in new revenue from the tax hike, along with $8.3 billion in spending cuts.

Polls show support for the tax increase measure, but its passage is far from assured. If the tax increase is defeated, a series of “trigger” cuts totaling $6.1 billion, aimed mostly at school spending, would kick in.

“It’s taken a decade to get into this mess,” Brown said at a Sacramento news conference. “Before I leave here, we will be in solid fiscal balance.”

Under Brown’s new budget plan, spending cuts would hit the state’s health-care program for low-income Californians and the elderly, reducing in-home support services and other medical programs. It would also slash the state’s CalWORKS welfare program by nearly $1 billion.

Additionally, state employee compensation would be reduced by 5 percent by cutting work hours.

If the tax measure passes, the budget would increase spending on K-14 education by $6 billion, to $53.7 billion, with further increases in later years. Public education funding has been cut drastically in recent years, but minimum levels are mandated by an earlier voter initiative.

If voters reject the tax measure, Brown proposed $6.1 billion in additional spending cuts, including $5.5 billion in cuts to spending on schools and community colleges.

Additionally, spending on the University of California and California State University systems would be cut by $500 million. The revised budget also proposes a $1 billion reserve.

Brown attributed California’s growing deficit to lower-than-expected tax collections, the failure of the legislature to make some agreed cuts in social programs and decisions by courts and the U.S. government to block $1.7 billion in cost-cutting measures.

The new plan projected a “modest” economic recovery for California, which would be the world’s ninth-largest economy if it were a nation.

The state’s economic prospects have improved slightly since Brown released his initial budget plan in January, according to the budget report. The technology industry is a pocket of strength, and the report said Facebook’s initial public offering this week could generate about $12 billion of additional income for California residents in the second half of this calendar year.

The IPO is expected to generate nearly $1.5 billion for California this fiscal year and in the next fiscal year, the report said.

The recession of 2007-2009 and the collapse of the housing market have had a devastating impact on state budgets across the country, but some states are in much better shape than others.

California and Illinois share the dubious distinction of having the lowest credit ratings among states. At A-minus, albeit with a positive outlook, California is at the bottom of Standard & Poor’s state ratings. Illinois’ A2 rating with Moody’s Investors Service is a notch below California’s A1 rating and the lowest among the states.

Illinois has a huge $83 billion unfunded pension liability and its chronic late payment of bills and other obligations has inflated its structural budget deficit. S&P has warned of a multi-notch downgrade of the state’s A-plus rating should the legislature fail to make progress on dealing with fiscal problems.

The two states also have the highest 10-year municipal bond credit spread over Municipal Market Data’s benchmark triple A scale. Last week Illinois’ spread was at 170 basis points and California’s at 72 basis points.

In California, where local property taxes are limited by law, and local services, including schools, are thus largely funded by the state, the most important source of government revenue by far is personal income taxes. Capital gains income from the state’s wealthy residents helps fill the state’s coffers in good times, but fall sharply in bad times.

California’s larger-than expected deficit did not faze traders in the $3.7 trillion U.S. municipal debt market, said Gary Pollack, managing director at Deutsche Bank Private Wealth Management in New York.

“The market is taking it in stride for the time being,” he said.

California bonds have been trading a little better over the last few weeks, aided by rising prices and falling yields in the overall municipal market, Pollack said.

California, the muni market’s biggest borrower, has about $80 billion in outstanding obligation debt, compared with its $1.9 trillion in economic output.

Reporting by Jim Christie; Editing by Jonathan Weber and Dan Grebler

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