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California in Crisis Mode As Deficit Passes $11B

SAN FRANCISCO - California's budget deficit has ballooned past $11 billion, forcing the state to take emergency actions, including sales tax hikes and spending cuts that need to take effect as soon as possible, Gov. Arnold Schwarzenegger said yesterday.

The uncertainty posed by the state's budget woes makes it very unlikely that the state will issue any new debt for the rest of the calendar year, said Treasurer Bill Lockyer.

Schwarzenegger called a special session of the Legislature and asked lawmakers to act as soon as possible. The session would have to end before Dec. 1, when the new Legislature that was elected Tuesday formally takes office.

"We don't have the luxury of waiting until January," Schwarzenegger said, referring to the date when the governor releases his formal budget proposal.

Schwarzenegger proposed a combination of tax increases and spending cuts to plug the gap. They include a three-year, 1.5% sales tax increase, as well as proposals to broaden the sales tax base by applying it to some services, like car repair.

When combined with local taxes, that would push sales tax rates above 10% in many jurisdictions.

Schwarzenegger also asked for the creation of a severance tax on oil production, and increase in alcohol taxes. Together, that would raise $4.5 billion in the current year if enacted promptly, his administration said.

He also proposed $4.7 billion in cuts to the current-year budget, including $2.5 billion to K-12 education.

The state treasurer's office had been planning a $2 billion revenue anticipation note sale this month, as well as a general obligation bond deal, but they are off the table for now.

"Current financial market conditions are not favorable, and with our state budget assumptions in flux during the Legislature's special session, securities disclosure requirements would make it difficult or impossible to access the credit market," Lockyer said in a statement. "Investors will want to see how the state addresses the budget imbalance before lending to us at reasonable rates."

Schwarzenegger has long repeated the mantra that California has a spending problem, rather than a revenue problem, but he turned it on its head at his press conference yesterday, saying the state is now experiencing a revenue problem, which is why some tax increases are needed.

"We unfortunately have no choice," he said. "We're gong to run out of cash by end of February and we will be unable to meet our obligations."

Tax increases require a two-thirds vote in each house, which would require at least a few Republicans to budge from their firm opposition to tax hikes.

Asked why he believes he can accomplish that, Schwarzenegger replied: "I think we have two changes here. We are now after the election, which makes it easier to deal with these things, and second, we are living in a different world now."

Schwarzenegger's finance director, Mike Genest, said there is no danger that the state would have trouble paying debt service, but that others would feel the pinch if lawmakers don't take action.

The state will get "uncomfortably low" on cash next month, and run out by March, he said.

"If we do nothing, there are going to be people owed money by the state, and we will not be able to pay them," Genest said.

He said there is no chance the state can issue revenue anticipation notes for cash flow without legislative action. "Who would lend us money until we get our budget back in shape?" he said.

Controller John Chiang issued a statement saying the state faced the prospect of issuing much more costly revenue anticipation warrants early next year unless quick action is taken.

"Today's news raises the very real risk that the state may face a severe cash shortage by late winter," Chiang said.

Sen. Don Perata, D-Oakland, the Senate president pro tempore until his term in office ends Nov. 30, issued a statement praising most of Schwarzenegger's proposals.

"Now it's up to the governor to persuade his fellow Republicans that raising revenues is the only responsible choice," he said.

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