SAN FRANCISCO - The California Pooled Money Investment Board yesterday cut off $3.8 billion of interim financing for capital projects at schools, hospitals, fire stations, and other public facilities to conserve cash as lawmakers struggled to solve the state's growing fiscal crisis.

Democratic lawmakers said just before press time that they would present an $18 billion budget plan that would partially close the state's growing deficit. They said it would not need the two-thirds majority typically required under California law, allowing them to pass their plan without Republican votes.

The state's $60 billion-plus pooled money investment account invests cash on behalf of local governments and state agencies. It typically provides interim bond anticipation loans for infrastructure projects, but with the state's budget in disarray and access to the municipal bond market limited, the board no longer feels it can lend money to keep infrastructure projects going.

"Today's action was extremely regrettable, but the responsible and right thing to do," said state Treasurer Bill Lockyer, who chairs the investment board. "We had no other option to keep crucial public services operating as long as possible."

The investment board is conserving funds to cover California's cash flow needs in the coming months. Controller John Chiang, who also sits on the Pooled Money Investment Board, expects the state to have more bills coming due than cash coming in by the end of March, possibly forcing the state to delay payments or issue IOUs to pay income tax returns and vendors.

California faces a $14.8 billion deficit in its $103.4 billion fiscal 2008-2009 general fund budget, and fiscal officials expect the gap to grow to as much as $25 billion next year. Lawmakers continued to struggle to find agreeable solutions to the budget crisis, which is sure to require deep cuts in public services and which Democrats and Gov. Arnold Schwarzenegger say also requires tax increases.

On Tuesday night, Assembly Speaker Karen Bass, D-Los Angeles, forced her colleagues to vote on a doomed Democratic budget plan that would have cut spending by $6.9 billion and increase taxes by $11.3 billion. The measure failed after garnering no Republican votes.

Democrats rejected a Republican plan to cut the deficit by $22 billion without new taxes by making deep cuts in education and social services. The Republican plan would have raised general fund revenue by $6.5 billion by tapping voter approved special tax funds that are devoted to children's health and mental health programs. It would have cut spending by $15.6 billion - including $10 billion cuts in school funding, a 5% cut in the Legislature's budget, a 10% cut in higher education spending, and various reductions to welfare and Medicaid programs.

Facing a deadlock, Democratic legislative leaders yesterday floated the idea of a bill that wouldn't require a two-thirds majority to pass. Details of the plan were not available by press time, and it was also unclear if the Democrats had really found a legal way around the requirement that lawmakers pass budgets and taxes with a two-thirds margin.

What was clear was that the pressure for lawmakers to act was building. Schwarzenegger and state finance officials have been demanding a solution since early November.

Standard & Poor's last week lowered its rating on California's $5 billion of outstanding revenue anticipation notes to SP-2 from SP-1, effectively cutting off short-term borrowing options. It also placed the state's long-term general obligation and general fund lease appropriations debt on negative CreditWatch.

Lockyer this week released a list of politically popular and economically important infrastructure and school construction projects across the state that would grind to a halt without a budget solution.

"It's now official - the failure to solve our budget problem has put in grave danger billions of dollars in revenue for our businesses and thousands of jobs on which our workers and families depend," the treasurer said in a statement. "California's fiscal house is burning down. The people still wait for their elected leaders to pull them out of the fire, stop the blaze, and rebuild the house on a solid, lasting foundation."

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