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California's $3.3B of Deficit Debt

SACRAMENTO — California plans to issue $3.3 billion in deficit bonds next month to stem a growing cash crisis in the state’s general fund.

The bonds, planned for the week of Feb. 18, will use up the remainder of the 2004 voter authorization of economic recovery bonds, which were planned to clean up the mess from the state’s previous budget crisis. Lehman Brothers will be senior manager on the deal, according to the state treasurer’s office.

The deficit bond issue was one of a series of budget-balancing measures Gov. Arnold Schwarzenegger announced yesterday when he released his executive budget proposal for fiscal 2009.

The budget laid out proposals to deal with a projected $14.5 billion deficit, which includes a $3.3 billion shortfall in the current fiscal year, plus what would be an $11.2 billion structural deficit for fiscal 2009 should existing programs and policies continue unchanged.

Despite the crisis, the Republican governor is not shying away from infrastructure finance proposals. The budget asks lawmakers to place $38 billion in new state infrastructure bond proposals before voters in 2008 and 2010. The budget also calls for allowing a $10 billion high-speed-rail bond measure to go ahead in November as scheduled.

Coinciding with the budget release, Schwarzenegger also declared a fiscal emergency yesterday, marking the first use of powers given him under a 2004 constitutional amendment designed to facilitate mid-year spending cuts when troubles arise.

Unlike the proposed mid-year spending cuts, the deficit bonds can be issued without any legislative action.

When the fiscal 2008 budget was enacted last summer, it projected that the state would close the fiscal year with a $4.1 billion reserve. But that reserve vanished through a series of events that included unbudgeted expenses, one-shot revenues that failed to materialize, and ongoing revenue collections below budget projections.

As a result, the Department of Finance now projects that the general fund will finish the current fiscal year with a negative balance of $3.3 billion, creating potential cash-flow problems.

“The deterioration in the budget reserve has also resulted in a projected cash shortage in March, July, and August 2009 unless swift and significant cash management solutions are put in place,” according to a briefing book the administration released to reporters yesterday.

In addition to the deficit bond issue, the administration plans $5.4 billion in other “cash management solutions” over the coming months, primarily by delaying payments the state government is scheduled to make for a wide range of programs.

The $11.2 billion structural shortfall represents more than 10% of the $102.9 billion in general fund revenue the state is projected to collect in 2009.

Schwarzenegger said his budget implements, as much as possible, 10% cuts from the so-called workload budget for fiscal 2009 that would have been in place if no changes were made. That would save $9.1 billion next year. He also said he was opposed to tax increases.

“You cannot tax your way out of the problem,” he said.

He used his fiscal emergency declaration to request that the cuts begin during the current fiscal year. But the cuts he proposed are certain to draw fire from across the political spectrum.

They include the suspension of Proposition 98 — a voter-approved constitutional guarantee of funding for K-12 schools. Such spending represents about 40% of the general fund, but the governor’s budget would cut $4 billion from the expected $43.6 billion guarantee for fiscal 2009.

The budget also calls for the early release of tens of thousands of inmates from the state’s prison system, a proposal that is sure to draw fire from the law-and-order groups as well as the powerful prison guard union, which would face layoffs under the plan, according to budget documents.

Schwarzenegger said the looming deficit demonstrates the need for the budget reform proposals he announced earlier this week, which would limit spending in years when revenues come in above projections, using the excess for a reserve to be tapped in years when revenues are weak.

“With tough times come historic opportunities,” he said.

After the budget was released, Assembly Speaker Fabian Nunez,D-Los Angeles, said he didn’t believe tax increases should be ruled out. “Everything should be on the table. Everything,” he said.

But tax increases would require Republican buy-in, because it takes a two-thirds vote in each house of the state legislature to adopt a budget, and GOP lawmakers have said they will stand firm against tax hikes.


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