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California Eyes Doomsday Budget

ALAMEDA, Calif. — California’s governor-elect, Jerry Brown, has to deliver a budget proposal on Jan. 10.

He won’t be sworn in until Jan. 3, but he’s already been busy over the last two weeks preparing people for how unhappy that budget is likely to make them.

The incoming governor held two forums on the budget — an event for state lawmakers Dec. 8 in Sacramento, followed by an education-focused forum Tuesday in Los Angeles.

The key takeaway from those sessions is that his budget is likely to include a lot of cuts.

At the Los Angeles forum, heavily populated with education administrators, teachers, and school board members, Brown warned his audience to be sitting down when he releases his budget Jan. 10.

“If you’re in a car, fasten your seat belt,” he said. “It’s going to be a rough ride, but we’ll get through it.”

Education spending accounts for the largest share of the state budget, and represents a potent source of political funding for the state Legislature’s Democratic majority. Brown warned them they won’t be spared.

“I can’t promise you there won’t be more cuts because there will be,” he said.

The Legislative Analyst’s Office is now projecting a structural general fund budget gap of up to $28 billion over the next 18 months.

The outgoing governor, Arnold Schwarzenegger, proclaimed a fiscal emergency when lawmakers were sworn in Dec. 6, and opened a special session of the Legislature to deal with the $6 billion gap expected in the current fiscal year, which ends June 30.

But nearly all of the solutions Schwarzenegger proposed would not take effect until after the new fiscal year starts July 1.

Brown said Tuesday that he expects nothing to come out of the special session. He insisted he’ll deliver a budget free of any of the gimmickry that both the executive branch and lawmakers have used to pass budgets this year.

Brown cited the LAO’s estimate that at least 75% of the solutions used to bring the last three state budgets into balance were either short-term in nature or failed to materialize, without addressing the long-term structural imbalance between spending and revenue.

“We’ve been living in a fantasy world,” Brown said Tuesday. “It’s much worse than I thought.”

The slight irony is that in the current fiscal year, California’s general fund is arguably in balance with about $93 billion in revenue and $92.5 billion in spending, according to the LAO. The $6 billion current-year deficit was carried from the previous year, and is likely to be pushed forward into next year.

That’s when things get a lot worse, with end of federal stimulus funding that brought California about $17 billion over three years, and the expiration of temporary state taxes that are bringing about $8.3 billion into the general fund in the current year.

The widespread speculation is that Brown is angling toward the early adoption of an extremely austere budget, while going to the voters in mid-2011 and ­giving them the option to extend the temporary taxes in order to save some programs that would otherwise be axed.

At an event Tuesday night, a reporter asked Brown if he’s considering a special election. “It’s something I don’t want to exclude,” Brown replied.

Brown, a Democrat, appears to be trying to develop a dialogue with members of both parties.

But his austerity message is likely to be harder to hear for his own party, which has fought a rear-guard effort against cuts ­proposed by the Republican ­Schwarzenegger.

Thanks to a ballot measure voters approved in November, Brown will only need a majority vote from lawmakers to pass the state budget, down from the previous two-thirds.

But it’s hard to imagine the Legislature’s Democratic majority lining up to support a budget made entirely of cuts. And the two-thirds supermajority requirement remains intact for many legislative actions, including any revenue increase or placing a measure on the ballot.

The state’s continuing drumbeat of bad budget news does not appear to have ­affected credit spreads for California ­general obligation bonds, according to Matt Fabian, managing director at Municipal Market Advisors. Thirty-year California GOs were about 90 points above the triple-A curve Wednesday, he said, well within their recent range.

“Spreads have been pretty steady,” he said. But there’s no doubt that the ­atmosphere of continuing crisis in Sacramento is having an impact, Fabian said.

“These days investors don’t just allocate because of ratings, maturity and liquidity, they allocate based on headline risk as well,” he said.

“The budget crisis isn’t getting any ­better so they’ll probably stay in the headlines for the foreseeable future,” Fabian said. “As a portfolio manger you have to be prepared to reduce your position or to continue to explain it.”

California’s GO bonds are rated A1 by Moody’s Investors Service and A-minus by Standard & Poor’s and Fitch ­Ratings.

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