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California Budget Revised

MAY 14, 2012 6:32pm ET
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SAN FRANCISCO — California Gov. Jerry Brown released a revised budget Monday that will try to bandage a projected deficit that has grown by $6.5 billion to nearly $16 billion for the next fiscal year.

The new budget proposes $4.1 billion of new cuts on top of those already included in the governor’s January proposal, bringing the total cuts to $8.3 billion from a $91.4 billion spending plan for the fiscal year that starts July 1.

“California has been living beyond its means,” Brown said during a news conference Monday. “We have to take our medicine.”

The governor said his January spending plan revenue projections, which only estimated a $9.2 billion shortfall, missed the mark by $4.3 billion because of a weaker-than-expected economic recovery and due to the federal government’s rejection of Medi-Cal cuts.

Brown said the new cuts would be achieved mainly through reductions to health care and welfare and education spending, and by using money from the shutdown of redevelopment associations, as well as reducing state employees’ work week by one day.

“We have to make sure it is a financeable budget,” Brown said.

The cornerstone of Brown’s budget is still a tax measure on the November ballot that he estimates would raise $8.5 billion over the next fiscal year. The measure would temporarily increase the state’s sales tax by one-quarter of a cent to 7.5% and taxes on income starting at $250,000, as well as raise taxes on those making more than $1 million to 13.3% from 10.3%.

The gain in tax revenue would mainly offset cuts to education and help buffer local law enforcement funds amid a shift of state prisoners to local jails. If voters reject the tax hike, it would trigger further cuts, mostly to education.

The governor’s tax pitch also faces competition that could make it harder to pass. Molly Munger, an attorney and daughter of Berkshire Hathaway Inc.’s vice chairman, Charles Munger, has proposed a rival tax initiative to help fund public schools.

In terms of bond sales, the governor’s proposed budget also points to a continued curtailing of bond sales. Brown plans on a “slightly lower” fall issue after the state already reduced its annual spring sale to $1.46 billion, according to the budget.

Last fall, California issued $2 billion of general obligation bonds.

Brown proposed only $5.2 billion of GO sales this year in his January budget after issuing nearly $5 billion last year, which was half of 2010’s volume and only about one-fourth of 2009’s.

The governor has been working on using unspent bond proceeds across departments to try to limit the need for more bonds. As a result, the Department of Finance said available unspent bond proceeds have been reduced by $7.3 billion, or 23%, as of the end of April compared to $9.5 billion in December last year.

According to the revised budget, general fund debt-service costs will fall by $172 million to $5.2 billion, mainly due to a $159 million decrease to $4.5 billion in GO debt service.

The state will stick to the $9.5 billion of external financing for its cash as included in the January budget, finance director Ana Matosantos said during the press conference. The state typically issues revenue anticipation notes to help balance its cash flow because tax collections come in stronger later in the fiscal year. “We are fine for cash this year,” Matosantos said. “We are looking at cash and how it works next year.”

Standard & Poor’s analyst Gabriel Petek said the one of the key elements of California’s low rating among states is the chance it could face a cash deficiency.

Both Standard & Poor’s and Fitch Ratings have California as the weakest state credit. Moody’s Investors Service has it two notches higher at A1, above Illinois.

S&P recently raised its outlook to positive from stable. Moody’s and Fitch give it a stable outlook.

Brown, a Democrat, has pointed to the improved outlook as an example of his success.

“The new larger estimated deficit does not negate some of the key ingredients to our positive outlook,” Petek said. “Whether they move forward or step back — in terms of their credit quality — therefore hinges to a significant extent on the substance of the deficit-closing measures.”

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