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California OKs Most Of Budget

California lawmakers passed $23.1 billion of budget balancing measures Friday, closing most of the state's estimated $24.2 billion budget deficit for this year.

The budget package would cut general fund spending by $15.6 billion. The revised $88 billion spending plan for 2009-10 is 10% smaller than last year's budget and down about 17.5% from the year before.

"Nobody likes this budget because there's not much to like about it," Senate President pro tempore Darrell Steinberg, D-Sacramento, said in a floor speech. "There are a whole host of decisions on the cut side that pain me greatly, deep cuts to education, to health and human services, to local government."

Lawmakers worked through the night Thursday and into Friday to pass the bills. The Senate passed the 33-bill budget package early in the morning Friday. Exhausted Assembly members continued to work to pass the bills until mid-afternoon Friday.

The package includes $2.1 billion of borrowing from local governments, $3.9 billion of "revenue solutions" that are primarily accounting changes, $400 million of fund interfund transfers, and $1.2 billion of expense deferrals.

The agreement included distasteful compromises for members of both parties, which explains the slow-going Friday. Gov. Arnold Schwarzenegger and legislative leaders agreed on the broad outlines of the package earlier in the week.

The plan hit schools, local governments, and public services hard, but it also avoided the deepest cuts the governor had proposed in May, including elimination of the state's welfare program, cutting off health care for 900,000 low-income children, and closing most of the state's parks.

While the budget plan makes deep spending cuts, many are not permanent. The plan doesn't include new taxes or raise much in the way of permanent, ongoing new revenues.

The legislation cuts $6.1 billion from local education spending, but it requires the state to pay $11.2 billion back to schools when the economy recovers. That figure also includes repayments for some cuts made last year. The payback provisions convinced Democrats and teachers unions to accept the education spending cuts.

Under the plan, California will "borrow" $2.1 billion of local property tax revenues, which must legally be repaid over three years. The budget legislation includes creation of a joint-powers authority that would help local governments securitize the repayment of property taxes borrowed by the state. The plan also calls for the state to cover cost of issuance.

The Assembly rejected a bill that would have taken $1 billion in local gas tax receipts from local governments and paid it back over ten years after local government officials from across the state protested the move.

The state will intercept $1.7 billion from local redevelopment agencies with no plan to repay the funds. However, the plan offers redevelopment agencies an out if the funds are required for debt service, but it requires the agency's parent city or county to pay any amount the agency cannot pay and requires repayment by the redevelopment agency. Local governments have vowed to sue to block the local revenue grab.

The legislation also includes a contingency plan that would allow the state to avoid borrowing from local property and gas taxes by issuing at least $7.4 billion of long-term debt backed by local redevelopment funds.

Democrats doubt the legality of the redevelopment securitization plan. The plan would extend the life of redevelopment agencies and take 10% of their revenues to back the new debt. Democrats agreed to the plan only after the addition of language requiring the state treasurer to seek judicial validation of the debt before going to market.

The budget fix also includes deep and politically painful spending cuts to basic public services. The plan cuts $2 billion from state universities, $1.2 billion from state prisons, $528 million from welfare, $226 million from in-home supportive services, and $124 million from health care for poor children.

While Democrats pushed for new revenues, Republicans refused to accept Democratic proposals to increase taxes on oil companies or cigarettes. The Assembly rejected the largest new revenue stream in package Friday after Republicans had agreed to an increase in oil drilling off the Santa Barbara coast, which environmentalists opposed. Democrats ultimately killed the measure that was to have raised $100 million, which reduces the budget's planned surplus to $800 million.

The plan's other revenue measures were either one-time measures or accounting changes. The plan budgets $1 billion from sale of the State Compensation Insurance Fund, an enterprise fund that provides workers compensation insurance for hard-to-insure private-sector workers.

The legislation also authorized the state to sell a number of state properties and to lease some of them back. The legislation doesn't specify how much the state hopes to make by selling property or the exact structure of the lease transaction.

The plan pushes some expenses into the future by requiring the controller to pay June 2010 payrolls in July, deferring the expense to the next fiscal year.

Despite complaints from both sides of the aisle, lawmakers said the budget plan would resolve the state's cash-flow crisis, which has forced state Controller John Chiang to pay bills with IOUs, or registered warrants, since the beginning of this month.

The crisis has led to multiple downgrades for California. Moody's Investors Service cut California's general obligation rating to Baa1 on July 14. Fitch Ratings cut the state's GOs to BBB and lowered its lease-backed debt to BBB-minus, the lowest investment grade, on July 6. Standard & Poor's rates California GOs A. All three agencies have negative outlooks on the debt.

A spokesman for Treasurer Bill Lockyer said approval of a budget was good news, but added that it was too early to say what the legislation means in terms of California's cash-flow borrowing needs.

"Making progress is definitely a good thing," said Lockyer press secretary Joe DeAnda. "We're looking at this budget in terms of our ability to borrow. The sooner there's a budget in place, the better that is for the state."

Lawmakers also gave the treasurer some help finding buyers for state debt. They authorized the State Compensation Insurance Fund and the state lottery to buy California's debt as part of the budget legislation.

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