SAN FRANCISCO (Reuters) - California Governor Jerry Brown on Monday unveiled a revised state budget plan that calls for new cuts to healthcare for the poor and elderly and reduced work hours for state employees as part of an effort to close a $15.7 billion budget gap.
Brown had said on Saturday that the projected deficit for the fiscal year beginning in July had increased from the $9.2 billion projected in January due to the slow economic recovery, less revenue and other factors including some cutbacks in social service spending blocked by the courts and federal government.
Since his election in 2010, Brown has been trying to address a chronic budget crisis that stems from the state’s sharp limits on local property taxes and heavy dependence on volatile income and sales taxes.
The California economy is the ninth largest in the world and just smaller than Italy’s economy.
State funding for education and social services has been in decline for years while spending on items including prisons and employee pensions has risen steadily.
Brown has insisted since he took office in 2011 that new revenues would be necessary to avoid additional cuts to schools. His budget proposal is counting on voters to approve a November ballot initiative to raise sales taxes and income taxes on wealthy residents.
The budget plan unveiled Monday calls for $8.5 billion in new revenue from the tax hike, along with $8.3 billion in spending cuts. The proposed general fund budget for the fiscal year beginning on July 1 amounts to $91.4 billion and the deficit is 17.2 percent of that.
California, the muni market’s biggest borrower, has about $80 billion in outstanding obligation debt, compared with its $1.9 trillion in economic output.
Polls show support for the tax increase measure, but its passage is far from assured. If the tax increase is defeated, a series of additional “trigger” cuts totaling $6.1 billion, aimed mostly at school spending, would kick in.
“It’s taken a decade to get into this mess,” Brown said at a Sacramento news conference. “Before I leave here, we will be in solid fiscal balance.”
Brown’s fellow Democrats reacted coolly to the proposed cuts in the revised budget but still embraced his tax plan.
“We will not have the resources we need to put California back on its feet without the revenues that the Governor is proposing in his November ballot initiative,” said Senator Mark Leno, the Democratic chairman of the Senate’s budget committee.
Meanwhile, Republicans criticized Brown’s tax plan. Republican Senator Tom Harman said Brown and top Democrats “seem fixated on raising taxes rather than making reforms.”
Under Brown’s new budget plan, spending cuts would hit the state’s health-care program for low-income Californians and the elderly, reducing in-home support services and other medical programs. It would also slash the state’s CalWORKS welfare program by nearly $1 billion.
Additionally, state employee compensation would be reduced by 5 percent by cutting work hours.
The social service cuts would follow steady reductions in previous years, according to Anthony Wright, executive director of Health Access, a health-care advocacy group.
“There’s been $15 billion in cuts to health and human services over the past three years,” Wright said. “Low income families are getting hit from multiple sides ... They’re working and going to get work but they’re getting benefits cut, childcare benefits cuts, which makes it harder to go to work.”
If the tax measure passes, Brown’s budget would increase spending on K-14 education by $6 billion, to $53.7 billion, with further increases in later years. Public education funding has been cut drastically in recent years, but minimum levels are mandated by an earlier voter initiative.
Brown’s budget also seeks to transfer financial responsibility to local governments for social services, courts, prisons and other services the state has traditionally provided.
The cuts proposed in the latest budget plan would affect benefits for 180,000 families in Los Angeles County, California’s most populous county, said county Assistant Chief Executive Ryan Alsop.
“They’ll ultimately use county services elsewhere,” Alsop said. “We’re the safety net. Whether there is state money or not, we ultimately have to take care of people.”
Brown’s budget plan projected a “modest” economic recovery. California’s technology industry is a pocket of strength, and the plan said Facebook’s initial public offering this week could generate about $12 billion of additional income for California residents in the second half of this calendar year. Brown said volatile earnings of high income taxpayers often have been a problem for the state’s coffers.
California and Illinois have the lowest credit ratings of all states. Standard and Poor’s rates California, its lowest rated state, at A-minus with a positive outlook. Moody’s Investors Service rates Illinois at A2, a notch below it A1 rating on California.
The two states also have the highest 10-year municipal bond credit spread over Municipal Market Data’s benchmark triple A scale. Last week Illinois’ spread was at 170 basis points and California’s at 72 basis points.
S&P analyst Gabriel Petek said he liked much of Brown’s revised plan, including its cautious outlook regarding revenue.
“Some of the numbers may prove to be resilient,” Petek said, adding that the plan is an “aggressive step toward addressing the budget shortfall.”
“Now it’s up to the legislature to act,” Petek said. “That’s what we will be focusing on.” The legislature faces a June 15 for approving a budget for the fiscal year beginning on July 1.
California’s larger than expected deficit did not faze traders in the $3.7 trillion U.S. municipal debt market, said Gary Pollack, managing director at Deutsche Bank Private Wealth Management in New York: “The market is taking it in stride for the time being.”
Reporting by Jim Christie; Editing by Jonathan Weber, Dan Grebler and Diane Craft