February 18, 2011 / 9:10 PM / in 7 years

California Republicans cool to Brown tax plan

SAN FRANCISCO (Reuters) - California Democratic Governor Jerry Brown’s plan to close the state’s huge budget gap is running into a wall of Republican opposition over a proposed referendum on extending tax increases.

<p>California Governor Jerry Brown speaks to reporters after delivering the State of the State address in Sacramento, January 31, 2011. REUTERS/Max Whittaker</p>

If Republicans hold firm and withhold votes for a tax ballot measure, they could force Brown and his fellow Democrats who control the Legislature to seriously consider a budget plan relying almost exclusively on spending cuts to tackle a deficit that may top $27 billion.

Putting a measure on the ballot requires a two-thirds legislative majority, which Democrats lack. They could try to put tax increases on the ballot on their own through procedural maneuvering, a worst-case option given that they want bipartisan support for a measure.

The political struggle over the budget in America’s most populous state comes as state finances garner attention in the U.S. Congress, where some have called for legislation to allow financially troubled state governments to declare bankruptcy.

State finances also are weighing on investors. They have fled U.S. municipal bonds recently, spurred by some analysts predicting a wave of defaults.

Brown unveiled his budget plan last month after being sworn in to his third term -- he was also governor in the 1970s and 1980s -- and Republicans are showing no interest in his proposal for a ballot measure on taxes until their demands for spending cuts and regulatory reform are met.

Some analysts had expected Republicans would propose talks with the governor to strike a deal on a tax measure in exchange for reforms aimed at the state’s pension system. But Republicans have yet to draft a plan on pensions and are hewing to their traditional anti-tax stance.

“Further increasing taxes will hurt the economy and put more people out of work,” Jann Taber, spokeswoman for state Senate Republican leader Bob Dutton, said on Friday.

Brown wants lawmakers to approve a budget framework by next month along with a tax measure to put on the ballot in June.

Senate President Pro Tem Darrell Steinberg said Democrats would press ahead with Brown’s plan, adding they were endorsing many of its spending cuts, which should appeal to Republicans.

“We’ve already made several billion dollars of cuts,” Steinberg told Reuters.

“We need to get voters the opportunity to have a say,” he added. “We’ll get this done hopefully with Senator Dutton. But with or without him, we’ll get this done.”


Brown’s budget plan pairs $12.5 billion in cuts with a referendum on extending tax increases expiring this year to plug the state deficit.

California’s leaders got a sense on Monday of how the state government would look minus revenue from tax extensions in a budget scenario based on spending cuts.

The scenario by the California Legislative Analyst’s Office outlined more than $13 billion in cuts on top of Brown’s proposed cuts from an $86.6 billion general fund budget. Additional cuts would fall hard on schools and public safety, largely spared in Brown’s budget plan.

While California’s budget politics are fueling broader concerns about the finances of state governments, muni market professionals such as Alexandra Lebenthal, whose family name has been synonymous with munis since the 1970s, say fear of defaults is overblown.

They point to legal requirements for municipal bond issuers, including nearly every state, to balance budgets and meet all their debt obligations to bondholders.

Investors holding California’s general obligation, or GO, debt have a call on state payments second only to schools, worth keeping in mind amid glum headlines about the state’s budget politics, said Herb Morgan of Efficient Market Advisors.

“If you actually get a sell-off in Cal GOs because of a headline, I’ll be the first guy in line to start buying,” said Morgan, whose firm in Del Mar, California, oversees $180 million in assets for high-net worth individuals.

Reporting by Jim Christie; Editing by Peter Cooney

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