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California To Hold Back $3 Billion

ALAMEDA, Calif. — With no obvious progress in sight on California’s seriously overdue budget, state financial officials announced plans to defer ­almost $3 billion in payments to schools and county governments next month.

That will conserve cash the state needs to make several high-priority payments in October — including $803 million for general obligation bond debt service Oct. 1, said H.D. Palmer, spokesman for the Department of Finance.

The deferrals were ordered in a joint letter from state finance director Ana Matosantos, Treasurer Bill Lockyer, and Controller John Chiang. They are using authority granted to them in a February bill, which gives them flexibility to reschedule payments owed to school districts and other ­local agencies to help the state maneuver around expected liquidity troughs.

It was designed in part to assure bond investors that the state will continue fulfilling its commitments to them despite its periodic budget stalemates.

“This is clear evidence we mean what we say,” Palmer said. California has never missed a bond payment, he said, and “we’ll move heaven and earth not to break that streak.”

The money the state conserves, however, won’t be available to agencies that need it. School districts face delays to $2.5 billion of funding, and county governments face a $400 million gap.

“Because of economic conditions, schools and counties are already facing budget challenges and have had to lay off employees and reduce services,” the letter said.

“The lack of a state budget is levying additional fiscal stress on schools and counties, and unfortunately, this ­accelerated deferral of state payments will further exacerbate the situation.”

The state has been without a budget since the fiscal year began July 1, and there is no obvious conclusion in sight to the standoff pitting the Republican legislative minorities — who don’t want any tax increases — against the Democratic majorities, who say some tax hikes are needed to preserve part of the social safety net and provide more money for education.

Because it takes a two-thirds vote to pass a budget, at least some votes from the minority GOP will be needed.

A number of ideas have surfaced.

Democrats have proposed to swap higher income taxes and property taxes on vehicles for lower sales taxes, saying the ability to take federal deductions for state vehicle and income taxes would mitigate the impact on individual taxpayers.

Republicans rejected the initial proposal out of hand, but Senate President pro tempore Darrell Steinberg told the press this week that he will try and revise the proposal.

There has also been talk — not tied to a specific source — that a final budget deal may involve borrowing from the California Public Employees’ Retirement System.

The borrowing is said to be tied in a plan to reduce pension benefits for new hires, something that Republican Gov. Arnold Schwarzenegger insists will be part of any budget deal.

“They have to roll it back to where they were, otherwise there is no signing of a budget,” Schwarzenegger said Tuesday during a speech to a chamber of commerce audience in Santa Barbara County.

Without a budget agreement, the likelihood grows that the state will begin issuing IOUs to some creditors to preserve cash for those with higher legal standing, such as bondholders.

On Aug. 10, Chiang said that could happen by late August or early September. That timeline hasn’t changed, spokesman Jacob Roper said Tuesday.

This week, the Senate approved a bill that would require the state to accept its own IOUs in return for taxes and fees recipients owe to the state.

AB 1506 passed both houses unanimously, but still requires Assembly action to accept relatively minor amendments made by the Senate.

Schwarzenegger’s Department of Finance opposes the bill, because it threatens to exacerbate cash-flow problems.

“It would in part cancel the cash-flow benefit to the state of issuing IOUs,” Palmer said.

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