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Crunch Time in California as Budget Deadline Looms

SAN FRANCISCO — It’s crunch time in California.

According to state law, lawmakers only have a week left to wrestle a budget over to the governor’s desk, and they just started tackling the beast.

The legislature mostly held off on making difficult budget decisions on closing the state’s $16 billion deficit, waiting for Tuesday’s primary election to play out. Now they have a very short window to battle over Gov. Jerry Brown’s proposed $91.4 billion budget.

State law says the budget should be passed by June 15. The new fiscal year starts July 1.

“It is definitely crunch time when you get to the first part of June, but the goal is still the same,” said Mark Hedlund, spokesman for Senate President Pro tem Darrell Steinberg, D-Sacramento.

To reach that goal, lawmakers still have to decide on some of the most controversial pieces of Brown’s budget, which saw its estimated deficit grow since January by $6.5 billion partly due to weaker than expected revenues and the federal government’s rejection of Medi-Cal cuts.

As a result, the governor has proposed cutting $8.3 billion, mainly from education, Medicaid and social services — likely a hard sell to the Democratic majorities in the Legislature.

Brown has also put forward a plan to cut state employees’ work week by one day.

The governor’s plan also relies on $5.9 billion in higher revenue estimates, partly from a proposed temporary tax hike that voters must approve and from the recent Facebook Inc. initial public offering. The social network has seen its share prices drop about 30% since the May 18 IPO.

The cornerstone November tax initiative would temporarily increase the state’s sales tax by one-quarter of a cent to 7.5% and raise taxes on income starting at $250,000, with rates on those making more than $1 million rising to 13.3% from 10.3%.

Besides voters, the governor’s tax initiative faces another challenge. Molly Munger, an attorney and daughter of Berkshire Hathaway Inc.’s vice chairman, Charles Munger, has muddied the waters by submitting a rival tax initiative to help fund public schools.

If voters reject the tax initiative, Brown’s budget proposal calls for triggering $6.1 billion of cuts, with the majority from education spending.

“Yes, it is a relatively short window of time, but experience has shown us that it can be done,” said H.D. Palmer, spokesman for the Department of Finance. “Look no further than last year.”

Last year, the governor signed the first on-time budget in five years on the last day of the fiscal year.

Brown vetoed the lawmakers first attempt at a budget, which passed by the June 15 deadline. That caused more than a few grumbles from his Democratic colleagues.

Two factors are still in place that helped push the lawmakers to that speedy budget decision.

One of them is Proposition 25, passed in 2010, which dropped the threshold for budget approval to a majority from two-thirds. It also said lawmakers must forfeit pay if the spending plan is late. But that part of the measure may have less of an impact this year.

State Controller John Chiang docked the Legislatures pay for last year’s late budget, saying the budget they initially adopted was not really balanced.

Legislative leaders sued in response, and a Superior Court judge ruled in April that Chiang does not have the authority to dock lawmakers pay for late budgets.

That leaves open the question of who, besides lawmakers themselves, will determine if they must lose pay for a late budget.

The second factor is that the governor is a Democrat. Even though Brown has at times clashed with his own party leaders in the Legislature, they generally get along with each other.

Before Brown, lawmakers battled through prolonged budget deadlocks because they needed to get some Republicans to cross over party lines to approve the budget by two-thirds, and also had to work with Republican Gov. Arnold Schwarzenegger to do so.

That scenario caused a budget stalemate in 2009, resulting in a cash crunch that forced Chiang to issue $2 billion of IOUs because the state could not go to the municipal market to sell revenue anticipation notes without an approved budget. That is what everyone says they want to prevent from happening this year.

“We need to be able to finance this budget in terms of being able to go to the market and sell Rans in a reasonable time after July 1,” Palmer said.

The state typically needs to sell the notes over the summer to help even out cash flow in its coffers because the majority of tax collections come in towards the end of the fiscal year.

Last year, Treasurer Bill Lockyer secured a bridge loan from a group of eight banks on July 26 in an effort to avoid potential market chaos amid Congress’ wrangling over the debt ceiling. The loan let the state postpone its regular Ran sale until September, when it sold $5.4 billion of notes.

A year earlier, Lockyer took out a bridge loan of $6.7 billion to give the state time to prepare a Ran sale after the state budget was adopted 100 days late. The treasurer sold $10 billion of notes in the public markets in November that helped repay the Rans.

State Finance Director Ana Matosantos last month said the state will stick to its projection of $9.5 billion of external financing needed for its cash flows.

Chiang’s spokesman, Jacob Roper, said the controller’s office doesn’t have any clear estimates of when a cash crunch may hit the state other than to say California typically needs to go to sell notes over the summer.

Earlier in the year, Lockyer sold $1 billion of  private placement notes as part of a plan to shore up cash flow after Chiang warned that California would run out of cash in February unless it adopted $3.3 billion of short-term measures.

“In recent years, cash flow has been forecast to become a problem before the end of the summer,” according to Douglas Offerman, the lead California analyst for Fitch Ratings. “I would say the state has developed a variety of tools in recent years to manage cash stress for certain periods of time. The state has those tools available.”

Offerman said he will be closely watching California’s cash situation in the coming year.

Another concern is whether the budget lawmakers pass will be able to leave the state’s credit ratings unaffected. Moody’s Investors Service and Fitch rate California A1 and A-minus, respectively, both with stable outlooks.

The Brown administration has hailed February’s Standard & Poor’s revision of its outlook on California’s A-minus rating to positive from stable as an example of its improved budget.

However, S&P has warned that could change.

“If lawmakers are unable to agree upon solutions to the state’s budget deficit that we view as credible, we may revise the outlook back to stable,” analyst Gabriel Petek said in report after the governor’s most recent spending proposal.

All credit rating analysts concurr that the Legislature needs to continue to make the state’s spending plan more structurally balanced — meaning fewer one-time fixes.

“We will be looking at the plan to achieve a balanced budget and whether they make progress on the state’s structural challenge,” Offerman said. “The big question will remain the outcome on the November ballot.”

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