California governor offers new budget fix plan

SAN FRANCISCO California Gov. Arnold Schwarzenegger on Wednesday proposed closing a $42 billion budget gap by shortening the school year, borrowing nearly $5 billion, raising the sales tax and tapping the state lottery.

But even if legislators agree with proposals to cover the next 18 months, California might run out of cash in February and have to defer some payments and resort to IOUs -- promises to pay.

California, the most populous U.S. state, is a social trendsetter that is also at the leading edge of local governments failing to come to terms with an economic crisis.

The state expects unemployment of more than 9 percent in 2009 and 2010 on top of a mortgage crisis that has already dented tax revenue.

"We are facing a major crisis," Finance Director Mike Genest said, showing the plan to reporters. "These are really difficult choices. These are substantial tax increase. These are major program reductions, and even with all of that we couldn't quite get there," he added, explaining the decision to try to tap the bond markets for $4.7 billion in July.

In addition, to make up the nearly $42 billion shortfall, a sales tax hike and other revenue increases would bring in $14.3 billion, spending would be cut $17.4 billion and $5 billion would be raised through the state lottery. That would leave about $95.5 billion in the state's main general fund for the budget year starting in July.

The new plan covers the remainder of the current budget year, which ends in June, and the 2009-2010 year that starts July 1 -- although the $4.7 billion debt issue would not be paid back until the following year.

Analysts were skeptical, given what Hoover Institution fellow Bill Whalen, a former Republican speechwriter, called a "cloud of rancor" in the state capital. "It is World War 1-style trench warfare," he said. "The legislature is badly polarized to the left and the right."

Democratic Assembly Speaker Karen Bass said the governor's new proposal adopted many tactics suggested by Democrats and argued that those ideas should be passed without delay.

But she pointed to other issues with the governor's package.

"There are significant questions about what revenue the lottery can really bring in," Bass said in a statement. "There are concerns about whether California can manage the additional borrowing the governor is proposing...and there are problems with cuts that seriously harm the students in our schools."

Schwarzenegger's plan would force schools to cough up $2.1 billion in cuts for the fiscal year ending in six months, while next school year would be shortened by five days. Parents would get less of a tax break for their children, and prisons, universities and health providers would all have to make due with less.

A real-time ticker on the governor's website showed an estimate of the budget gap to date ticking past $7,464,839,000 at midday on Wednesday. He counts 56 days of "failure to act."

Standard & Poor's Managing Director Steve Zimmermann said investors wanted more than a plan. "Until there's a signed agreement, it's not done," he said.

(Editing Leslie Adler)