Regional News

Again, California Sets A Budget

SAN FRANCISCO — California lawmakers on Tuesday prepared to pass a budget with the governor’s blessing, one that appears to avoid major structural changes but relies instead on a rosy revenue outlook.

The proposed budget, likely to pass with votes only from the Legislature’s Democratic majorities, depends on cuts plus $4 billion of future revenue to fill a $9.6 billion hole. If the $4 billion evaporates, cuts to education and other services will be triggered to bring the budget back toward balance.

 “Unlike the governor’s original and revised budgets, this approach would not appear to make much improvement to the state’s fiscal structure, meaning there is a fairly predictable budget gap to deal with for next year already,” said Standard & Poor’s analyst Gabriel Petek. “I’m not aware that the budget package involves any reforms of the state’s pension plans, and it adds to the state’s deferrals for part of the solution.”

Gov. Jerry Brown and fellow Democratic leaders announced the new budget deal Monday after the governor vetoed the Legislature’s adopted spending plan last week because it used too many one-time fixes and legal maneuvers to mend the deficit.

Brown had been unable to get Republican support for a key part of his earlier budget proposal that would have set a special election to extend temporary tax increases. But that required a two-thirds majority vote and GOP support.

The temporary taxes will now be allowed to expire. Lawmakers were scheduled to convene late Tuesday to vote on budget bills.

Senate Republican Leader Bob Dutton said Democrats rejected GOP changes that included pension reform and a spending cap.

Under terms of a ballot measure passed last year, lawmakers had been losing pay for every day without a balanced budget after June 15 deadline. The fiscal year ends June 30.

During a press conference Monday, Brown, along with Senate President Pro Tempore Darrell Steinberg, D-Sacramento, and Assembly Speaker John Perez, D-Los Angeles, said the budget bridges the deficit using 75% structural solutions and will lead to a structurally sound budget in 18 months.

“It is a good budget, but it is not the budget that I started with in January,” Brown said. “We still have our wall of debt hanging out there, we still have work to do.”

The governor and the Democratic legislative leaders said they would consider an initiative next year to help raise revenues.

The budget agreement includes language that essentially eliminates most local redevelopment agencies, which may trigger a legal battle that could stall local economic development.

John Shirey, executive director of the California Redevelopment Association, said in a statement Tuesday his organization plans to file a lawsuit to prevent the legislation from going into effect. 

Experts have said agencies and businesses may suffer as financing for economic development remains in limbo.

Whether bond and note investors will buy into the budget remains unclear, but California Treasurer Bill Lockyer Tuesday said the budget is “financeable.”

In a letter to the governor and Democratic leaders, Lockyer said the budget plan reduces the need for cash-flow borrowing by as much as $2 billion, setting up a sale of $5 billion of revenue anticipation notes later this summer

The state had been slated to go to market this summer with a $10 billion Ran issue to help balance out cash flow to pay for operations. The Legislature’s budget vetoed by Brown had projected a $7 billion note sale.

“I am confident the plan provides sufficient assurance that the state can repay its normal summer cash-flow borrowing by the end of the budget year,” the letter said.

Tom Dresslar, a spokesman for the treasurer, said the budget agreement assumes $10.6 million in additional debt-service savings in fiscal 2012, but that does not necessarily mean the state will reduce the amount of bonds it plans to issue.

In past years, the budget delay forced California to hold off on the Ran sale, causing Controller John Chiang to take special measures, such as presenting IOUs to some creditors instead of money, to shore up cash flow.

The proposed budget “may allow the state to avert a liquidity shortfall of the kind we have seen in recent years by accommodating cash-flow borrowing,” Petek said. “The key here will be in the details.”

The analyst said Standard & Poor’s will closely watch the state’s cash flows with an eye on whether the improved revenue projections fail to materialize and on the timing and amount of cash savings from the potential cuts.

California GOs carry ratings of A1 from Moody’s Investors Service and A-minus from Standard & Poor’s and Fitch Ratings.



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