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California Hunkers Down Into 3-Way Standoff

SAN FRANCISCO - The debate over California's long-overdue budget has hardened into three distinct and irreconcilable positions.

Democratic lawmakers say they will hold the line against most budget cuts to close the state's $15.2 billion structural budget deficit. Republican lawmakers say they are adamantly opposed to any tax increases.

Gov. Arnold Schwarzenegger, who has broken with his GOP colleagues over tax increases, says he will hold firm against any plans to borrow against transportation funds and scheduled transfers to local governments.

However, Schwarzenegger's promises conspicuously exclude redevelopment agencies.

Unless one of the three parties gives way, there is no endgame in sight to the budget standoff. Democratic lawmakers have majorities in each house, GOP lawmakers have leverage because some of their votes are needed to obtain the two-thirds majority needed to pass a budget, and Schwarzenegger has his veto power.

The fiscal year began July 1, and this year's stalemate is close to breaking the record for the longest such deadlock, set in 2002, when then-Gov. Gray Davis signed the budget on Sept. 5.

The state constitution says Sunday is the deadline to pass legislation.

Schwarzenegger stood with city officials at a press event Wednesday promising to block budgetary borrowing.

"I think it's fiscally irresponsible for Sacramento to again think about borrowing and taking money from local government and from transportation in order to close the budget deficit and in order to fix our problem," he said.

Redevelopment, on the other hand, is on the target list.

Schwarzenegger last week took the unusual step of making another budget proposal.

The headline news was his willingness to support a sales tax increase. Deeper in the fine print, the administration also proposed, for the next three years, transferring at least $225 million a year in tax increment financing from redevelopment agencies to schools and community colleges in their counties, thereby reducing the state's required general fund contribution.

"The news from the state capitol is not good," California Redevelopment Association executive director John Shirey wrote Wednesday in an update to members. "A permanent take of redevelopment money is on the hit lists of the caucuses of both political parties in the Legislature." He added that such a shift would violate the state's constitution.

According to another fact sheet from the association, under the governor's proposal, redevelopment agencies unable to make the payments because of their existing indebtedness would have to adopt a resolution declaring an inability to pay. That would prohibit them from adopting new redevelopment plans, amending plans to add new territory, issuing bonds, or encumbering funds or spending money from any source, except to pay previously issued bonds or other financial obligations.

Local government interests, peeved at repeated budget shifts over the years, in 2004 pushed for the ultimately successful Proposition 1A, which was designed to make it more difficult for the state government to take funds normally ticketed for local governments while setting deadlines to repay such borrowings.

It also gave the locals the authority to securitize such borrowings, allowing 146 local governments to issue $454 million in notes in 2005 backed by the state government's promised repayment of vehicle license fee, or VLF, payments that had been withheld in 2003.

Local government organizations are lobbying hard this year to avoid a similar budget shift, warning that it won't be as easy this year to securitize such a loan.

"Due to the collapse of the municipal bond insurance market and general chaos in the municipal bond market, these costs would be significantly higher than in the past," according to a fact sheet prepared by the League of California Cities, the California State Association of Counties, and the California Statewide Communities Development Authority, which issued the "VLF backfill securities."

Higher general municipal bond interest rates, combined with the lack of affordable bond insurance, mean that a securitization would cost participating cities between 10% and 15% of the total loan amount, compared with a total 8% on the 2005 VLF securities, the fact sheet says.

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