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California Budget Deal Doesn't Stop IOUs

SAN FRANCISCO - As California Gov. Arnold Schwarzenegger yesterday signed a series of budget revisions to address the state's deficit and cash-flow troubles, the controller's office continued printing IOUs to pay many of the state's bills.

While the governor sealed last week's budget deal yesterday, it will take time to determine how the legislation will actually affect the state's cash flows, said Hallye Jordan, spokeswoman for Controller John Chiang.

Because of the cash crunch, the controller since July 2 has been issuing registered warrants, or IOUs, to creditors without legal or constitutional protection, in order to conserve cash for those with such protections, including bondholders

Through Monday, California had issued more than $1.08 billion in IOUs and will continue printing them until the controller's office gets a detailed read on the state's cash position, according to Jordan. She added that it won't be until next week that the controller is expected to get the data from the governor's budget office.

"The controller has said that once we get the numbers from [the Department of] Finance, we'll work around the clock and have that testing completed in three or four more days," Jordan said.

Under that timeline, late next week would be the earliest time frame for the controller's office to finish its work.

"Once the controller's made that determination that the state has sufficient cash to pay those bills, we'll turn off the IOUs," Jordan said.

It won't be until the cash figures are finalized that officials can determine the size and structure or precise timing of the cash-flow borrowing that the state plans in the near future.

Schwarzenegger's signature yesterday enacts the budget revisions driven by state revenues that continued to decline even after previous budget revisions were enacted in February.

His office claimed that the package signed includes $24.1 billion in budget revisions, including $16.1 billion in spending cuts, with the balance through interfund borrowing, fund shifts and the like.

Schwarzenegger yesterday announced $489 million in line-item vetoes from a multitude of programs that helps to make up for revenue reductions enacted in the Assembly-approved package. Back-benchers in the Assembly Friday tossed out two items from the deal negotiated by the governor and legislative leaders: a $100 million deal to allow a new oil well off the coast and a $1 billion shift in gas tax funds from local governments to the state.

Among the revenue measures, lawmakers approved a plan to borrow $1.9 billion from local governments, though local governments should come out even if they can get access to the bond market. The fine print in the budget bills allows them to securitize the state's debt to them, and makes the state responsible for interest and costs of issuance.

Under the current language, the securitization could not take place until after Dec. 1, an unintended consequence of a companion bill that did not survive the legislative process, according to Jean Hurst, lobbyist for the California State Association of Counties.

"We think that needs to be revisited" to allow the securitization to reach the market sooner, she said.

The bill said the securitization debt, which would be repaid in three years, must be issued through a joint powers authority with at least 100 members. That's because the measure was modeled on the bill that authorized the 2005 securitization of the state government's borrowing of vehicle license-fee revenue from local governments, which was issued through the California Statewide Communities Development Authority.

"There may be other JPAs out there that may be eligible to sell the notes," Hurst said. "My impression is that CSCDA is willing to do the securitization for us."

Schwarzenegger's line-item vetoes drew fire yesterday from Senate President pro tempore Darrell Steinberg.

"We question whether the majority of these vetoes are legal," he said in a statement. "The governor has the right to blue-pencil an appropriation. The funding levels identified in the budget revision in many cases are not new appropriations. This is not the last word."

Indeed, there may be more words to come on several other components of the budget package, which only has a $500 million reserve.

They include the assumption that California will realize $1 billion from selling part of the State Compensation Insurance Fund's book of business, as well as $800 million in spending cuts to state prisons, the details of which remain to be legislated.

Meanwhile, the Schwarzenegger administration now projects a $7 billion to $8 billion structural deficit for fiscal 2011.

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