July 10, 2009 / 12:24 AM / in 8 years

No easy scenarios for California budget crisis

5 Min Read

<p>Registered warrants, or IOUs, are printed at the State Controller's office in Sacramento, California in this July 2, 2009 file photo.Max Whittaker</p>

SAN FRANCISCO (Reuters) - Tom Campbell aims to become governor of California after serving as the state's finance director, arguably the kind of job experience the state's cash-strapped government could use in its top office.

But there are no easy scenarios that will lead to a resolution of the state's budget crisis, Campbell said in an interview on Thursday.

Recession and rising unemployment are hammering California, the world's eighth-largest economy, and have opened a historic $26.3 billion state budget gap.

The deficit could be plugged if state leaders truly feared the state tipping into a financial abyss, said Campbell, who also has been a state lawmaker, U.S. House representative and University of California, Berkeley business school dean.

Instead, talks between Governor Arnold Schwarzenegger and lawmakers over closing the budget gap have ground to a halt amid partisan bickering, Campbell told Reuters.

"Right now it's at a stalemate ... It's really depressing," Campbell said as California entered the second week of its fiscal year without a balanced budget.

Campbell said he is especially concerned about more budget turmoil arising from the state issuing "IOUs" promising payments to vendors and for tax refunds. More than $350 million of the IOUs have been issued since July 2 in an effort to preserve the state's dwindling cash for priority payments, including to investors holding state debt.

But Campbell, who had served Schwarzenegger as his second finance director, sees the IOUs triggering lawsuits compounding the state's already messy budget troubles.

Federal Court Intervention

Campbell, who holds a doctorate in economics and a law degree, said if major banks no longer accept the IOUs after Friday as they said they would, lawsuits are certain.

With bank windows closed, IOU recipients may need to turn to check-cashing shops or a secondary market some entrepreneurs aim to create for the warrants. They would charge fees or demand discounts, costs to recipients that federal judges would almost certainly decree unfair, Campbell said.

"After Friday there will be no readily available way to get 100 cents on the dollar," said Campbell, whose rivals for the Republican bid for governor include former eBay Inc CEO Meg Whitman and Insurance Commissioner Steve Poizner.

Campbell said he expects U.S. judges would intervene in the state's budget mess by ordering the state to sell properties to make IOU recipients whole. That could help the state prop up its finances -- for the time being. The state also could lease buildings and pocket windfalls. However, its long-term financial problems would remain, Campbell said.

Another scenario he sees is Schwarzenegger and lawmakers, already in agreement that most of the budget gap will be covered by deep spending cuts, balance the state's books with a "plug."

The 'Plug' and Obama Scenarios

A "plug" writes an expectation, such as fictional revenues, into a budget. It would be an expedient to put a budget in front of Schwarzenegger, who could edit the plug out in subsequent line-item cuts.

"It's a clear statement that the legislature can't make the cuts so the governor gets to," Campbell said, adding it would only temporarily paper over the state's budget imbalance.

Schwarzenegger and lawmakers could also raise taxes, but the governor would have to reverse his opposition to such a move and, improbably, rally support among Republican lawmakers.

Democrats urging higher taxes on corporations may be posturing. They don't want business groups blaming them for hurting payroll growth, capital investment and shareholders in a weak economy.

"Businesses are very sensitive to the fact that when there is a state budget crisis, terms like 'loophole closers' come to the fore," Campbell said.

A final scenario for ending California's budget impasse is for President Barack Obama to mount a bailout for the state, or at least agree for the U.S. government to back short-term debt the state needs to sell in the near future, Campbell said.

Obama could rally support among fellow Democrats who control both Congress and the California legislature, while skeptical Democrats and Republicans could be won over if a rescue includes a receivership board like the one that helped right New York City's finances in the 1970s, Campbell said.

"California is not in doubt politically in the presidential sweepstakes. He could really ride tough over California," Campbell said.

Editing by Dan Grebler

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below