U.S. News

California governor sees $15.4 billion gap

SACRAMENTO, California (Reuters) - California Gov. Arnold Schwarzenegger on Thursday proposed harsh measures to tackle a budget shortfall of at least $15.4 billion, including deep spending cuts for schools and health programs and the elimination of 5,000 state jobs.

California Governor Arnold Schwarzenegger speaks at a news conference after being briefed on the Jesusita fire in Santa Barbara, California May 7, 2009. REUTERS/Mario Anzuoni

Schwarzenegger warned the budget gap for the state’s next fiscal year could grow to $21.3 billion if voters reject budget-related ballot measures in a May 19 special election. And he said California also will need to sell a $6 billion revenue anticipation warrant to help balance its books.

“Our revenues are coming in way below projections,” Schwarzenegger said, adding that California, the most populous U.S. state, has no choice but to cut spending -- even after deep cuts in a February budget agreement with lawmakers that closed a budget gap of more than $40 billion for the current and next fiscal year.

Schwarzenegger said education spending needs to be cut by at least $3 billion, which may require shortening the state’s school year by five days, and he will seek spending cuts across social and health-care services funded by the state.

If the ballot measures fail and California’s deficit swells to $21.3 billion, Schwarzenegger said education could suffer an additional $2.3 billion in spending cuts and social and health programs would see their budget cuts even more.

The Republican governor said the state’s revenues have plunged amid the recession, which has slashed collections of personal income taxes as unemployment has climbed.

The stock market’s turmoil has also sharply reduced revenues from capital gains taxes and California’s housing market is in a deep slump, which is hurting consumer spending and in turn denting collections of retail sales taxes.

Despite the deep spending cuts proposed in his budget plan, a revised version of his earlier plan, Schwarzenegger voiced adamant opposition to any tax increases. He said during a press conference in the state capital of Sacramento that he would not sign a budget that includes higher taxes.

Schwarzenegger, however, said he hopes to raise revenue by selling seven state properties, including San Quentin State Prison and the Los Angeles Coliseum, two aging state facilities.


Larry Gerston, a political scientist at San Jose State University, said Schwarzenegger’s budget plan gives lawmakers a choice between “Armageddon and Armageddon-lite.”

“At this point if we’re not talking about a doomsday scenario, it’s pretty close,” Gerston said.

And one financial adviser likened California to Detroit, one of the most financially troubled U.S. cities whose credit rating has been cut to junk status.

Tom Tarabicos, a financial adviser at Covenant Wealth Group of Wells Fargo Advisors Financial Network LLC in Roswell, Georgia, said California’s finances are under so much stress that he will not hold the state’s debt.

“I have sold all of my clients’ municipal bonds related to the state of California and any of its municipalities. ... A real disaster is developing in California,” Tarabicos said.

“A lot of California bonds, school bonds, redevelopment bonds are yielding between 6 percent and 8 percent,” he said. “Whenever yields pop up like that the first thing that pops up in my head is, that’s a weak credit.”

“We’re putting California on the same level as Detroit,” he added.

State Senate President pro Tem Darrell Steinberg, one of the Democrat-led legislature’s top officers, said lawmakers are ready for painful decisions given limited revenues.

“While Californians will have a chance to affect our budget deficit in next week’s election, it doesn’t change the fact that there are difficult choices ahead,” Steinberg said. “Regardless of what happens on May 19, on May 20 we will begin to respond to this fiscal challenge swiftly and responsibly, doing the best we can with the money we have.”

Editing by Leslie Adler