U.S. News

California Senate approves state budget bills

SACRAMENTO, California (Reuters) - California’s Senate approved a package of bills on Friday that would balance the state budget by closing a $26.3 billion shortfall threatening the finances of the government of the most populous U.S. state.

Registered warrants, or IOUs, are printed at the State Controller's office in Sacramento, California July 2, 2009. REUTERS/Max Whittaker

The legislation must still be approved by the state Assembly before going to Governor Arnold Schwarzenegger.

The Republican governor and top lawmakers in California’s Democrat-led legislature agreed on Monday to a budget deal that paved the way for the bills, some imposing deep spending cuts and taking money from local governments to balance the state’s books.

California’s leaders agreed to the extreme measures because the state economy, which would rank as the world’s eighth largest were the state a country, is suffering double-digit unemployment that has slashed personal income tax collections, the state government’s main source of revenue.

Underscoring the U.S. recession’s tight grip on California, the state’s jobless rate in June was unchanged from May at 11.6 percent and sharply up from 7.1 percent a year earlier.

“It’s not over until it’s over but it’s definitely a positive step,” said Edith Behr, a state rating analyst at Moody’s Investors Service, referring to the Senate passage of the budget bills.

She added that parts of the solution to the state’s budget gap could raise concerns.

“I think these solutions will help this year but will create some additional problems for the future,” she said, referring to one-time measures, including taking money from local governments with a requirement to pay it back.

Standard & Poor’s Ratings Services analysts agreed and said they were focused on how the budget fix will impact the state’s cash position.

“That’s an absolutely critical element to the state’s credit position,” said analyst Gabriel Petek.

He added that the municipal market must also find California’s budget fix credible in order for the state to be able to issue revenue anticipation notes.

Reporting by Jim Christie; Additional reporting by Karen Pierog in Chicago; Editing by James Dalgleish