IE 11 is not supported. For an optimal experience visit our site on another browser.

Schwarzenegger reaches California budget deal

By Jim Christie
/ Source: Reuters

By Jim Christie

California Governor Arnold Schwarzenegger and top lawmakers agreed on Monday to close a $26.3 billion deficit in the state's budget in a deal that includes $15.5 billion in spending cuts, they said.

The government of the most populous U.S. state, also the world's eighth-largest economy, began its fiscal year on July 1 facing the massive shortfall due to a plunge in revenues caused by the recession and rising unemployment.

Schwarzenegger, a Republican, said during a news conference the budget would be balanced through deep spending cuts and borrowing and shifting of state funds but without raising taxes.

"All around I think it is a really great, great accomplishment," said the former Hollywood action star, noting the closing rounds of budget talks, which dragged on for weeks, had been like a suspense movie.

The Legislature's top Democrats and Republicans said they would brief rank-and-file lawmakers on the agreement in the hope of holding votes in the Democratic-controlled state Assembly and Senate on Thursday.

Democratic leaders acknowledged the agreement contained painful spending cuts in popular programs, the result of mounting financial woes for the state's government since 2007.

Public schools, colleges and universities would lose $9 billion in funding, prisons more than $1 billion and cities and counties roughly $4 billion. Many state employees would have to take three furlough days each month through June 2010, which amounts to a roughly 14 percent pay cut.

"There isn't a whole lot of good news in this budget," said Senate President Darrell Steinberg.


The state's revenues have been sliding amid the lengthy housing slump, the mortgage crisis and credit crunch, turmoil on Wall Street, the recession and rising unemployment.

State officials reported on Friday that California's jobless rate in June was unchanged from May at 11.6 percent, its highest level in modern state records, and up from 7.1 percent a year earlier.

Double-digit unemployment is striking hard at the money the state collects in personal income taxes, its biggest revenue source. Those revenues are suffering their worst decline since the Great Depression.

Consumers have also been sharply reining in their spending, resulting in a drop in revenues from retail sales taxes.

Wall Street has grown increasingly nervous about California's finances and has the state government on notice to expect higher borrowing costs as it prepares to sell short-term debt after Schwarzenegger signs the budget into law.

In the spending plan, the governor and lawmakers included an $875 million reserve to help ease concerns at credit rating agencies.

Fitch Ratings on July 6 cut its rating on California's long-term general obligation bonds to BBB, or two notches above "junk" status, and kept the debt on watch for additional downgrades.

Similarly, Moody's Investors Service last week cut its rating on about $72 billion of the state's general obligation debt by two notches to Baa1, or three notches above speculative status, and said the rating may suffer further downgrades.

Both rating agencies were concerned by the lengthy budget stalemate's effect on the state government's dwindling cash.

Without a balanced budget, California entered July at risk of burning through its cash, so state Controller John Chiang on July 1 began issuing "IOUs" instead of payments to vendors and to taxpayers owed tax refunds.

The IOUs have allowed California to hold on to cash for its priority bills, including payments to investors holding its bonds.

Without IOUs, the state would have run out of cash and begun missing its priority payments at the end of this month, a recent statement by Chiang's office said.

A signed budget would be a reprieve for the state government from its fiscal woes because they are sure to return soon if the economy does not rebound and federal stimulus aid runs out, said Stephen Levy, director of the Center for the Continuing Study of the California Economy.