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California Budget Delayed

SAN FRANCISCO — It's as plain as day in Article 4 of the California Constitution: "The Legislature shall pass the budget bill by midnight on June 15 of each year."

Never happens.

Won't happen this year, either. And it probably won't by the July 1 beginning of the budget year.

There's a huge gap between Republican Gov. Arnold Schwarzenegger and the Democrats who control the Legislature over how to close the $15 billion structural deficit the state faces heading into fiscal 2009.

But there's another large gap between the solutions favored by the Democrats in the Assembly and those in the Senate, though both plans similarly assume billions of dollars in new, unspecified revenues.

Schwarzenegger's proposals include securitizing the state lottery to generate $15 billion, including $5.1 billion in fiscal 2009, in a plan that would be tied together with budget reform and a new rainy-day fund.

The Assembly's Budget Committee came up with a plan that includes the lottery bonds, though not the rainy-day fund, and would instead use proceeds from the lottery bonds to finance ongoing debt service payments. It relies on $6.4 billion in unspecified new revenue to finance $102 billion in general fund spending.

The Senate's budget plan rejects the entire lottery bond plan and calls for $11.5 billion in new taxes and revenue. A conference committee convened yesterday to take up the differences between the two houses' budget plans.

While the budget committees and conference committees can act on party-line votes, passage of an actual budget requires a two-thirds vote, which will require votes from at least some tax-averse Republicans.

It could point to a budget quagmire, which is a matter of concern as state finance officials have indicated that California's deteriorating cash position could require the controller's office to raise cash by issuing revenue anticipation warrants as opposed to the less expensive and less complicated revenue anticipation notes issued by the treasurer's office if no budget is in place by or near Aug. 1.

"If our colleagues are not willing to negotiate and they're serious about asking for $11 [billion] or $6 billion in taxes, the are going to be no votes and we will be here in August or later," Assembly Republican Leader Mike Villines told public radio station KQED Wednesday.

"We're not going up on taxes," he said. "We're not going up $11 [billion] or $6 billion in taxes. It's total insanity."

The state controller's office has retained Tim Schaefer of Fieldman, Rolapp & Associates as financial adviser for a potential Raw transaction, and Bill Donovan of Orrick, Herrington & Sutcliffe LLP as bond counsel. Underwriters would be named later, perhaps in July, spokeswoman Hallye Jordan said in an e-mail.

State Controller John Chiang did release his monthly cash balance report Tuesday, finding mixed results that resulted in general fund revenues within $1 million of the projections in the governor's May budget proposal.

Personal income tax receipts were strong, Chiang reported, but sales tax receipts were 3.5% below budget.

"The weakness of the sales tax should have everyone concerned," he said in a statement. "The declines in consumer spending illustrate a lack of consumer confidence that not only affects the state budget, but also local governments throughout California."

Lawmakers seeking guidance on how to handle the budget probably shouldn't seek it from the state's voters, to judge from the results of a Field Poll opinion survey that was released Tuesday.

When asked about the budget deficit in general terms, the registered voters surveyed preferred spending cuts to tax increases by a margin of 63% to 26%.

But when asked about thirteen specific state spending categories, more voters opposed than supported cutbacks in each area, pollsters reported.

The category of spending that drew the most opposition to cutbacks was public schools, with 80% of surveyed voters opposing cuts. This happens to be the largest single component of the state budget.

More voters said they would accept cuts to prisons and corrections than any other category, but that was still a minority of 47%.

No matter what their own preferences are regarding taxes, more than eight in 10 voters surveyed 81% said they expect that in the end the state will have to increase taxes to resolve its current deficit.

The report was based on a random sample survey of 1,052 registered voters statewide, with a maximum sampling error of plus or minus 3.2%, according to the Field Poll.

Investors appear to have made their own calculations about the budget scenario, as spreads between long dated California general obligation bonds and the triple-A GO yield curve have widened, according to Municipal Market Data.

As of Wednesday, California bonds maturing in 2028 were 50 basis points above the triple-A curve, according to MMD, compared to 39 basis points three months earlier.

Bonds maturing in 10 years showed a 48 basis points spread Wednesday, compared to a 23 basis points spread a year earlier, with similar variations visible through the yield curve.

California is scheduled to get an even clearer indication of its market reception on June 24, when it plans to sell $1.5 billion in GO bonds.

Citi is slated to run the books on the deal for a 35-member syndicate.

In advance of the deal, Moody's Investors Service affirmed its A1 rating and stable outlook on California yesterday. The other two agencies have yet to report on the forthcoming bond issue, but Standard & Poor's rates California A-plus with a stable outlook. Fitch Ratings assigns an A-plus rating, and placed the state's GOs on negative watch in January.

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