U.S. News

California budget approved 100 days late

SACRAMENTO, California (Reuters) - California on Friday approved a state budget filled with spending cuts and creative accounting to fill a $19.3 billion deficit, 100 days after a spending plan should have been in place.

The exterior shot of the California State Capitol,February 17, 2009. REUTERS/Max Whittaker

Governor Arnold Schwarzenegger signed the main budget bills late on Friday, although critics fear his successor, to be elected on November 2, will immediately face a new shortfall as 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.

“These are sobering times,” Schwarzenegger, a Republican, told a morning news conference.

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

The budget may come in time to 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 to issue 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 a 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.

Douglas Offerman, an analyst at Fitch Ratings, said the new budget is “very much in line with what we’ve seen in the last couple of years,” in terms of containing significant cuts and one-time measures.

Standard & Poor’s said it would not change its rating or outlook because of the budget, which did not necessarily come soon enough to avoid IOUs. “The state’s cash position could actually deteriorate in the short term before being replenished with a cash flow borrowing,” it said in a statement.

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.


Local officials waiting on state funds delayed 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 week 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, and Schwarzenegger used the line item veto to cut about $960 million more in spending, chiefly from social services, to bolster a reserve fund to $1.3 billion.

The plan includes more than $1 billion in revenue from postponing a corporate tax break and roughly $3 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 also would put before 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 reform. The state spends more on government retirees than on higher education, he noted on Friday, calling pensions “the silent thief” from the state treasury.

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

Additionally, the plan expects $5.4 billion from Washington, which so far has promised only $1.4 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; additional reporting by Karen Pierog and Peter Henderson; Editing by Jan Paschal, Dan Grebler and Diane Craft