May 29, 2009 / 6:38 PM / 11 years ago

California budget fix worries local governments

SAN FRANCISCO (Reuters) - California’s massive budget deficit — now seen at $24 billion — is unnerving local governments statewide, which fear the state will grab some of their money and endanger their credit ratings.

Governor Arnold Schwarzenegger has proposed the state borrow $2 billion from local governments to help fill its budget shortfall, one of many controversial financial proposals the Republican governor has put forth to the state’s Democrat-led legislature.

Other proposals include laying off thousands of state workers, sharply reduced spending for the state’s two university systems, early release for prison inmates and eliminating state welfare that provides assistance to needy families — proposals that have cast a gloom over legislators.

“People are walking around with their heads down,” said Assemblywoman Noreen Evans, chairwoman of the legislature’s budget conference committee.

California’s weakening economy has likewise left mayors, city managers and county councils across the state despondent.

“I’ve never seen anything like this,” said Miguel Pulido, mayor of Santa Ana, California. “They’re not selling cars at the auto mall and sales are down at shopping malls.”

“We’re just cutting, cutting, cutting,” he added. “We have already diminished our work force by about 150 from about 2,000 at our peak and we’re very likely on our way to another 150.”

VALLEJO AS A MODEL

Schwarzenegger and lawmakers in February notched a deal to balance the state’s books through June 2010, an effort since undone by plunging revenues as personal income in the state retreats for the first time since 1938. Facing another cash crisis, state officials say they must consider tapping local coffers — even if they are thin.

Concern over a money grab is acute in Vallejo, which last year became the largest city in the state to file for bankruptcy.

Vallejo officials fear losing $2 million in the face of a $13 million budget gap, said City Councilwoman Stephanie Gomes: “When we were heading into bankruptcy, we had to cut down to the bone and now we’re cutting into essential services ... We’re at a minimum level of funding right now and we cannot afford to lose more police officers and fire stations.”

Vallejo could have company in bankruptcy court if the state takes too much local money, said John Moorlach, an Orange County supervisor.

“We have so many impacts on our cash flows that we are slowing depleting our reserves,” Moorlach said. “Taking $2 billion from cities and counties will accelerate that depletion ... You may see Vallejo as a model for what some other municipalities in the state may have to do.”

Local governments also worry borrowing costs may rise if Wall Street lowers credit ratings if budget repairs are slowed and reserves reduced by the state dipping into their coffers.

“It’s coming at a challenging time for them,” said Gabriel Petek, a credit analyst at Standard & Poor’s Ratings Services.

Local governments also face credit risks if they lose state money. “Any reliance on state funding has bleak implications at this point,” Petek said.

Even if the state takes some money from Anaheim, the hometown of Disneyland will have a cushion of about $24 million, underscoring fiscal prudence that rating agencies should take into account when gauging the loss of local revenues to the state, said Mayor Curt Pringle.

“We’re hoping they see distinctions,” said Pringle. “We’ll be glad to stand by what we’ve done in our city.”

Editing by Kenneth Barry

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