U.S. News

California faces fresh problems funding huge deficit

SAN FRANCISCO (Reuters) - California’s struggle to fund its budget deficit faced fresh problems on Thursday, after U.S. Treasury Secretary Geithner refused to use bank bailout money to help state finances, and the state’s fiscal watchdog objected to a plan to sell warrants to raise cash.

California Governor Arnold Schwarzenegger speaks to the media in Washington D.C. May 20, 2009. REUTERS/Peter Grigsby/Office of the Governor/Handout

California faces thousands of job cuts and deep spending cuts to state health, education and other services as the nationwide economic slump has reduced tax revenues.

On Wednesday, voters soundly defeated ballot measures to bolster the state’s finances, leaving Gov. Arnold Schwarzenegger and lawmakers facing a budget gap of more than $21 billion.

Early Thursday, U.S. Treasury Secretary Timothy Geithner during testimony before a House of Representatives Appropriations subcommittee, said the Treasury was not able to tap the $700 billion Troubled Asset Relief Program for bank bailouts to help California.

California State Treasurer Bill Lockyer had earlier this month urged the U.S. Treasury to extend guarantees for short-term debt to financially strapped states and local governments facing declining revenues.

“We do not believe that (the fund) as currently legislated provides a viable solution to this specific challenge,” Geithner said, adding that Treasury was not legally able to guarantee new debt issues.

In a letter to Geithner, Lockyer had said essential public services could suffer “devastating impacts” unless states and local governments are able to borrow short-term funds as they normally do amid recession, and that without short-term borrowing, California, the most populous U.S. state, could face difficulty in selling its long-term debt.

Later Thursday a report from the state’s fiscal watchdog said California lawmakers should reject Schwarzenegger’s plan to sell $6 billion in revenue anticipation warrants (RAWs) to raise cash for the state government as it tries to fill its budget gap.

The California Legislative Analyst’s office said in a report that Schwarzenegger’s plan for the short-term debt would be a “terrible precedent and a poor fiscal policy,” and “presents serious legal concerns.”

“If used now and in the future to address annual deficits, RAWs would render meaningless constitutional restrictions on state debt obligations and requirements for a balanced budget,” the report said.

“We recommend that the Legislature reject the proposal and replace it with other solutions,” the report added.

Last week Schwarzenegger said the government of the most populous state in the United States faced a shortfall of $15.4 billion for its next fiscal year even if voters approved fiscal ballot measures in Tuesday’s special election, underscoring the severe downturn in state revenue amid recession and double-digit unemployment.

With the measures defeated, California now faces 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.

“The public is under the delusion that they can have everything -- 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 revenue shrinks.

Reporting by Jim Christie in San Francisco; Additional reporting by Glenn Sommerville, Kevin Drawbaugh, Emily Kaiser and Mark Felsenthal