ALAMEDA, Calif. — The collapse of California budget negotiations this week brings with it questions about the state’s ability to schedule its annual, multibillion-dollar note sale to fund its cash flow.

Gov. Jerry Brown, a Democrat, announced late Tuesday that he has given up on negotiations with a handful of the Legislature’s minority Republicans to secure the votes needed to bring about a ballot measure this June asking voters to extend some temporary taxes.

Majority Democrats had lined up behind the proposal, but some GOP support was needed to achieve two-thirds majorities to place the measures on the ballot.

Brown has identified a $26.6 billion general fund budget shortfall. So far, lawmakers have approved $14.5 billion in cuts and fund shifts, but Brown was counting on the tax extensions to supply the balance.

The administration’s budget plans call for it to access the market this summer for the state’s annual revenue anticipation note sale, in the $10 billion range.

That can’t happen unless there is a truly balanced budget in place first, said Tom Dresslar, spokesman for Treasurer Bill Lockyer. California won’t be selling long-term general obligation bonds, either, until that balanced budget is set, he added.

“The bottom line in terms of Rans and infrastructure bonds is the timely adoption of a balanced budget,” Dresslar said.

It’s not clear what exactly happens next. There has been talk of funding a signature-gathering campaign to put a tax measure before the voters this November.

Senate President pro tempore Darrell Steinberg, speaking to the press Tuesday afternoon, shot down speculation that Democrats will try to call a June tax election on a majority vote, using the Legislature’s recently won authority to pass budget legislation on a majority-vote basis.

Any such effort would almost certainly be challenged in court.

The treasurer is well aware that investors want certainty before buying California paper, Dresslar said. That’s why it’s important to have a definitive balanced budget in place, he said.

“It can’t be contingent on something happening in the future,” Dresslar said. “It’s got to provide investors adequate comfort and coverage for their investment.”

Any scenario dependant on a November election would push the state out of the long-term bond market until early 2012 at the soonest, Dresslar said. The state has already called off its usual spring GO bond issue.

Standard & Poor’s, in a news release Wednesday, said it would focus closely on California cash management as it monitors the state and its rating, currently A-minus with a negative outlook.

“If the state is unable to enact a budget prior to the start of the fiscal year on July 1, we expect its cash-flow borrowing options to be complicated because it will be precluded from publicly issuing revenue anticipation notes,” Standard & Poor’s said.

“Extraordinary cash management actions such as certain payment deferrals or IOUs might in our view again prove critical to the state’s credit level if fiscal 2012 were to begin without a budget in place,” according to the rating agency.

Brown called off negotiations after failing to come to agreement with potential Republican swing voters for a package that would include pension reform, reduced business regulations, and a spending cap.

It culminated with what Brown described as a 53-point series of Republican demands.

“Each and every Republican legislator I’ve spoken to believes that voters should not have this right to vote unless I agree to an ever-changing list of collateral demands,” Brown said in a statement announcing the end of talks. 

Steinberg promised that Democrats will deliver a budget by mid-June, using the provisions of Proposition 25, the constitutional amendment voters approved in 2010 allowing state budgets to pass on majority vote.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.