SAN FRANCISCO California Gov. Arnold Schwarzenegger and lawmakers will likely face the arduous task of closing a state budget gap in excess of $21 billion with a clutch of ballot measures aimed at bolstering the state's finances poised for defeat.
The Republican governor last week said the government of the most populous U.S. state faced a shortfall of $15.4 billion for its next fiscal year even if the measures were approved -- underscoring the severe downturn in state revenues with personal income in California shrinking for the first time since 1938 amid recession and double-digit unemployment.
Without voter approval for the measures, California would face a $21.3 billion deficit, according to Schwarzenegger, who with the state's Democrat-led legislature put the measures to voters as part of a February budget compromise to close a nearly $42 billion shortfall through June 2010.
Initial results for Tuesday's special election posted by California's secretary of state showed voters soundly rejecting the five fiscal measures on the ballot. A sixth measure barring pay increases for state officials amid deficits was winning.
Surveys in recent weeks had found little support for the fiscal measures and Schwarzenegger all but conceded defeat by joining President Obama in Washington on Tuesday for his announcement on auto emission rules instead of campaigning for the measures through election day.
Voters said they disliked the specifics in the measures -- including a spending cap, extending tax increases, borrowing against lottery revenues and tapping dedicated funds -- and used the election to rebuke the governor and lawmakers.
"We have a dope for a governor and the legislature is completely incompetent," said John Brockage outside a polling place in Oakland, California. "I voted 'no' on all of them."
LOOKING TO WASHINGTON
Tuesday's election results will likely be seen by state officials as a rejection of tax increases to close the state's budget gap and they may resort to deep spending cuts, which voters may regret, analysts said.
"The public is under the delusion that they can have everything -- have potholes filled, new freeways, a good education system -- but they aren't willing to pay for it ... A lot of critical services are going to be cut and there will be serious consequences," said Jim Hawley of the Elfenworks Center for the Study of Fiduciary Capitalism at St. Mary's College of California.
Schwarzenegger last week said 5,000 layoff notices would be sent to state employees and spending cuts could fall hard on education. That stunned teachers whose school districts are already under financial pressure as their revenues shrink.
"I'm actually a little bit nervous," said Ashley Hodge, 25, a teacher from Sonora, California. "We need supplies ... and the school is getting ready to do a second round of layoffs."
Schwarzenegger also said California would sell a $6 billion revenue anticipation warrant to raise cash. But that may be difficult with state finances in a roil because "Short-term debt has to be paid back before the state is out of the woods," said Paul Rosenstiel, a principal at investment bank De La Rosa & Co.
Washington could backstop that debt to ease investors' concerns about California's finances, according to State Treasurer Bill Lockyer. Last week he urged U.S. Treasury Secretary Timothy Geithner to extend debt guarantees through the $700 billion Troubled Asset Relief Program to states and local governments to help them borrow short-term funds.
Washington is taking the idea seriously, said Eric Friedland, director of municipal research at Belle Haven Investments Inc in White Plains, New York. "California may be too big to fail," he said. "Everyone is talking about it so it's at the top of the agenda."
California is in such a bind that the U.S. government may also need to mount a cash rescue, said Daniel Mitchell of the University of California, Los Angeles School of Public Affairs: "If we got what they've already thrown at the auto industry, that would solve our problems for the next year or two."
(Additional reporting by Braden Reddall in Sacramento, California; Editing by Jan Dahinten)