SAN FRANCISCO California Governor Jerry Brown on Thursday vetoed an "unrealistic" budget passed by fellow Democrats in the state legislature and insisted on either extending tax hikes or making deep spending cuts.
The hardball move drew immediate praise from financial professionals and other observers, although Democrats who pushed through the plan on Wednesday complained that Brown wanted too much and needed to find Republican support himself or move on from his tax plan which has languished for months.
"California is facing a fiscal crisis and very strong medicine must be taken," Brown said in a video address, later urging Democrats to cut deeper and Republicans to allow a state vote on the budget.
The veto would "shake up the system in a way that will get a better result, however difficult the next few days may be," the Democrat governor later told reporters in Los Angeles.
"We are deeply dismayed," responded Senate President Darrell Steinberg, a Democrat and an author of the vetoed budget. "What's wrong with declaring partial victory?" he added in a news conference, saying that Brown appeared uninterested in a "Plan B" for closing a $10 billion budget hole.
Budget politics in California, the country's largest municipal bond issuer, are closely monitored on Wall Street, and federal policy makers are watching the state for a fiscal disaster they fear could spread.
DRAWING A HARD LINE
Brown, 73, returned to lead California three decades after his first stint as governor and is fond of saying that "breakdown" can pave the way for "breakthrough" in politics.
"For a decade the can has been kicked down the road and debt has piled up," Brown said in a video announcing the veto.
He added in a written statement that the budget advanced by the legislature's Democrats contained "legally questionable maneuvers, costly borrowing and unrealistic savings."
State Controller John Chiang, who had threatened to dock lawmakers' pay if they did not meet their deadline on Wednesday to approve a budget, said Brown made the right call.
"We need long-term, sustainable solutions," Chiang, a Democrat, told Reuters.
Public support for Brown's tax plan has waned in recent months, polls show, but his hard line pleased at least some.
"This comes under the heading of cracking skulls and we'll see what comes out of that," said municipal bond expert Jim Lebenthal of New York-based Lebenthal & Co. "He's doing a very difficult, correct thing."
With Brown's veto the timing of a budget for the fiscal year beginning July 1 is uncertain. But Christian Stracke, head of credit research at PIMCO in Newport Beach, California, said that does not worry him if Brown follows through on his vow for a spending plan free of one-time moves and gimmicks.
"He's decided to take a stand, and to take a stand to continue to try to address the long-term fundamental fiscal problems California faces," Stracke said.
John Miller, whose muni bond investment team at Nuveen Asset Management in Chicago oversees $75 billion in assets, said he doubts the veto will hurt demand for the state's debt: "The biggest fundamental positive is the revenue increase and the biggest technical positive is that they're not issuing general obligation bonds, which is constraining supply."
NEED FOR COMPROMISE
Brown's position has been that tax hikes should be extended for a few years or spending would have to be slashed. He urged Republicans to allow a statewide vote on extending tax hikes. Only four Republicans need to throw in with the legislature's Democrats to advance a tax measure to the ballot.
"If a handful of Republicans will not vote to let the people exercise their sovereign right to say yes on tax extensions or no then we're in a much more difficult place. And the more deeper cuts to schools and universities, it's going to be on their hands," Brown said in Los Angeles.
Senate Republican Leader Bob Dutton countered that Republican demands had to be respected.
"Californians deserve a budget that stands the test of time, and that requires the real reforms that they are demanding -- meaningful pension reform, a spending limit and business-regulation relief for job creation," Dutton said.
Brown had opened the door to a budget compromise including those demands and in Los Angeles he urged Democrats to make concessions in those areas.
Brown criticized parts of the Democrats' budget, including a plan for selling state buildings, while favoring others, like its plan for Internet retailers such Amazon.com. to collect sales taxes.
"Making sure that people similarly situated pay their sales tax is a common-sense idea," Brown said.
Bob Stern, president of the Center for Governmental Studies in Los Angeles, expects slow going for budget talks: "The one thing that is easy to predict usually is inaction."
(Reporting by Dan Levine, Jim Christie and Peter Henderson in San Francisco and by Alex Dobuzinskis in Los Angeles; Editing by Jackie Frank and Cynthia Osterman)