Regional News

Schwarzenegger: Act or We'll Go Broke

SAN FRANCISCO - California is in a dire fiscal position and lawmakers need to act quickly to fix it, Gov. Arnold Schwarzenegger said yesterday in an address to a joint session of the Legislature.

"If we don't act, the state will simply run out of money and go insolvent," Schwarzenegger told the lawmakers, before encouraging them to step up for the good of the state.

Immediately following the Republican governor's short speech, the leaders of the Democratic majorities responded in a press conference by pledging to cooperate, but saying they would defend some of the programs Schwarzenegger has proposed to cut.

"There's a lot that we agree with but one of the things we fundamentally disagree with is that we eliminate the safety net in almost every way," said Assembly Speaker Karen Bass.

Lawmakers thought they had the fiscal 2010 budget solved early this year, enacting a budget in February designed to close a general fund budget gap of $40 billion.

But California's revenue position has continued to deteriorate, and voters in a May 19 special election voted against ratifying about $6 billion in revenue solutions contained in the February budget compromise.

Since the special election failure the Schwarzenegger administration has released multiple budget proposals, each of them featuring more cuts as the state's revenues continue to shrivel because of the recession.

"Our revenues have dropped 27% from last year," the governor said. "We are now back to the same level of revenues we had in 2003 and when you adjust for inflation and population, we are back to the level of the late '90s."

The state's general obligation bonds currently carry A level ratings from all three ratings agency, though Fitch Ratings Friday revised its outlook to negative. The other two agencies maintain stable outlooks.

State Controller John Chiang, a Democrat, also warned Friday that the government faces an imminent cash crisis, on a scale that would dwarf the cash shortfalls of earlier this year, if lawmakers don't act quickly to bring the budget into balance. He suggested June 15.

The state will be $1 billion short of cash by July 31, he said, adding that he is planning a short-term revenue anticipation warrant borrowing to address the cash-flow crisis.

"To complete the borrowing needed by July 29, my office will have to meet with credit rating agencies and launch a major investor outreach effort in mid-June," Chiang wrote in a letter to lawmakers Friday. "Without credible budget and cash-flow solutions in place, the rating agencies and potential investors who will be evaluating the credit risk of these securities will be highly skeptical about investing in California."

In all, Schwarzenegger is proposing about $24 billion in cuts to balance a general fund budget with about $92 billion in revenue.

His most recent round of proposals included the complete elimination of the CalWORKS program, the state's primary welfare program for families with children, to save $1.3 billion in fiscal 2010 and $1.7 billion the following year. He also proposed the complete elimination of Cal Grant college scholarship program, to save about $173 million next year and $450 million annually thereafter.

Bass and Senate president pro tempore Darrell Steinberg indicated their strong opposition to those cuts yesterday.

"We must continue to find away to invest in health care for children, higher education, to continue to help people transition to work," he said. "We need to be surgical about the way we go about cutting, and cut we will."

Steinberg was more receptive to the governor's depiction of the crisis as an opportunity to reform the state's system of governance, suggesting it is appropriate to consider aligning more services - as well as revenue-raising responsibility and opportunities - with local governments.

"Our levels of government are so tangled up within one another that the public is rightly frustrated, because they don't know who raises the money and provides the services," he said.



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