October 8, 2010 / 3:56 PM / 9 years ago

WRAPUP 1-California budget approved 100 days late

* Budget goes to governor, who’s expected to sign it

* Local governments need state funds, want budget ASAP

* Investors want to see more details

By Jim Christie

SACRAMENTO, Calif., Oct 8 (Reuters) - California lawmakers on Friday approved a state budget filled with spending cuts and creative accounting to fill a $19.1 billion deficit, 100 days after a spending plan should have been in place.

But critics fear the governor to be elected on Nov. 2 will immediately face a new shortfall as the budget’s rosy revenue assumptions prove unfounded. That’s a familiar story for California, which has seen its revenue plunge in recent years due to recession as well as turmoil in financial and housing markets.

Both chambers of the Democrat-led Legislature endorsed the budget, hammered out by top lawmakers and Republican Gov. Arnold Schwarzenegger last Friday to end a record stalemate over a spending plan for the most populous U.S. state.

State Senate President Pro Tem Darrell Steinberg said the process had been particularly tortuous, given the weak economic background.

“We’ve done more than OK,” he said.

Schwarzenegger must still sign the budget, which may avert the embarrassment of California resorting to IOUs later this month. Last year, contractors were given IOUs during a lengthy budget impasse while investors holding state bonds were paid on time, following state Constitution guidelines.

State Treasurer Bill Lockyer needs an enacted budget to move forward with plans for issuing billions of dollars in short-term debt to raise money for the state government’s cash-flow needs.

How municipal debt investors respond to the planned sales of the debt, called revenue anticipation notes, depends on the extent of financial gimmicks in the budget, said Marilyn Cohen, president of Envision Capital Management of Los Angeles.

Schwarzenegger and top lawmakers negotiated the budget agreement behind closed doors. The deal’s outline was announced on Wednesday, but in the last-minute rush of compromising, some details were unclear.

California, the biggest issuer of U.S. municipal bonds, has a long history of late budgets that include provisions that raise the eyebrows of public finance analysts.

“Investors want to see something substantive,” Cohen said.

Democrat Jerry Brown, the state’s attorney general and a former governor, and Republican Meg Whitman, the former chief executive of eBay Inc, aim to succeed Schwarzenegger, who cannot run for governor again because of term limits.

ANXIOUS LOCAL GOVERNMENTS

In contrast, local officials waiting on state funds held back during the budget stalemate — the state has $8 billion in unpaid bills for a variety of programs and projects — said a spending plan cannot be enacted soon enough.

“You’ve got to get things moving. You’ve got to patch something together to keep operations going,” said John Moorlach, an Orange County supervisor.

Having a state budget in law is “extraordinarily important,” added Mayor Chuck Reed of San Jose, California’s third-largest city.

The finances of local governments won’t be clear until local officials learn whether or not the state will tap their coffers, Reed said.

“The instability it creates all across the state is bad for the state, bad for business,” he said.

Schwarzenegger and top lawmakers last Friday notched a budget deal as California entered the fourth month of its fiscal year, which began July 1, without a spending plan.

They compromised on spending cuts and raising revenue and signed off on rosy assumptions about tax collections and financial aid from Washington.

Tax hikes were excluded in the $87.5 billion budget plan at the insistence of Schwarzenegger and Republican lawmakers.

The plan’s centerpiece is a spending reduction of $7.5 billion. It includes $1.2 billion in revenue from postponing a corporate tax break. Another $2.8 billion is added from transfers from state funds.

Democrats had resisted Schwarzenegger’s push for $12 billion in cuts and pressed for delaying the tax break.

The plan would also provide for a reserve of more than $300 million, put to voters a measure in 2012 to bolster a rainy-day fund and roll back public pension increases for new state employees approved in 1999. Schwarzenegger had said he would not sign a budget unless it included pension reforms.

The plan includes the expectation of $1.4 billion in higher than previously forecast state revenue, when it is unclear revenue will rise, given California’s dire economy and double-digit unemployment rate.

Additionally, the plan expects $5.3 billion from Washington, which so far has promised only $1.3 billion.

Moorlach doubts those assumptions — and predicted Schwarzenegger’s successor will face the same financial problems he has in recent years: “It just gets us over the line and leaves the systemic problems in place.”

Brown and Whitman will have a clearer financial view of what awaits California later on Friday, when State Controller John Chiang is expected to post his monthly revenue report. (Reporting by Jim Christie; Editing by Jan Paschal)

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