Key Week for California Budget Talks

SAN FRANCISCO - This could be the week California lawmakers enact a plan to solve the state's $40 billion budget gap.

Or not. It might be the week that the plan crashes and burns.

What can be said is that "Big Five" negotiations involving the governor and the party leaders from each house of the Legislature are continuing.

"There's no handshake yet," Alicia Trost, spokeswoman for Senate president pro tempore Darrell Steinberg, D-Sacramento, said yesterday morning, adding that her boss is committed to bringing the budget to a vote, "hopefully this week."

Steinberg has said that he is trying to get a comprehensive budget deal to cover both the shortfalls this year as well as to adopt the budget for fiscal 2010, which starts July 1.

Details about a budget agreement remain murky, though its outline is obvious - painful tax increases and program cuts.

That appears to be the reason the negotiators have kept things under their hats, as interest groups from the left to the right have already indicated plans to make it hot for lawmakers who leave their reservations - such as Republicans who vote for tax hikes, or Democrats who vote to loosen labor laws, a proposal widely believed to be part of the package.

The deal is tough to do because the budget shortfall is so large, and a budget package will require two-thirds votes in each house, meaning votes are needed from both majority Democrats and at least some minority Republicans.

California's dwindling cash reserves may bring additional pressure to bear on lawmakers. Friday marked the first day of widespread unpaid furloughs for state employees, which meant that Californians experienced things like closed driver's license offices.

Controller John Chiang has already stopped many scheduled payments, such as income tax refunds, and Friday would mark the first suspension of state funding to county governments for providing state-mandated social programs.

This has sparked anger at the county government level, ranging from threats to stop making county-to-state financial transfers to halting unfunded social services.

The long budget crisis has affected California general obligation bonds, but they haven't completely diverged from the wider muni market, according to Alexander Anderson Jr., private client portfolio manager at Los Angeles-based Envision Capital Management Inc.

Investors appear to believe that there will be a budget agreement in Sacramento, or if the state's financial crisis deepens the federal government will cover it in some way, he said.

"The ramifications if neither of those things comes about are huge," Anderson said.

California GOs remain cheaper than the general market, but they have appreciated over the last month as part of a general municipal market rally, he said.

On Friday California GOs traded between 73 and 142 basis points above the Municipal Market Data triple-A curve.

"We certainly aren't overweighting California GO bonds right now, but we aren't going out of our way to liquidate, either," Anderson said. "We're waiting and watching how it plays out but we think they are going to be just fine."

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