Market News International: California Watch

13:28 EDT 07/21

{California Watch: $26 Billion Budget Deal Reached>}

–Lawmakers to vote on Calif. budget deal Thursday

–Two-third vote needed to approve California budget deal

 

By Chris H. Sieroty

 

   LOS ANGELES (MNI) – California is expected to stop printing IOUs

after Gov. Arnold Schwarzenegger and lawmakers reached an agreement on a

plan to close the state’s $26.3 billion budget shortfall.

 

   The governor and lawmakers announced the compromise late Monday,

almost three weeks after the state began issuing IOUs to thousands of

state contractors and vendors. So far California has issued more than

$661 million in IOUs, according to the state controller’s office.

 

   A vote on the agreement, which is composed of cuts, borrowing and

fund shifts without raising taxes, was expected Thursday. The deal will

need to receive a two-thirds vote in both the state Assembly and Senate

before it’s send to the governor’s office for his signature.

 

   Assembly Speaker Karen Bass, D-Los Angeles, and other legislative

leaders urged lawmakers to approve the compromise plan, describing it as

the best way to close the state’s budget deficit and prevent further

decline of the state’s credit rating, which is already the worst in the

nation.

 

   “These are painful solutions for all Californians and many of the

cuts we have to make would be unthinkable if we weren’t in the midst of

an unprecedented and ongoing recession that is plaguing our nation and

our state,” Bass said. “But despite a two-thirds vote requirement that

hamstrings our ability to pass responsible revenue solutions, we’ve

prevented irreparable harm to our schools and prevented the proposed

elimination of California’s safety net.”

 

   The compromise includes billions in cuts to education, health care,

prisons, welfare and other programs. The rest of the deficit will be

made up by a combination of borrowing from local governments, shifting

money from other government accounts and accelerating the collection of

certain taxes.

 

   Schools will take a $6 billion cut, but won a commitment to be paid

back $9.3 billion in cuts from previous years. The agreement also cuts

$2.8 billion from the University of California and California State

University systems, $1.2 billion from the corrections department, and

$1.3 billion from MediCal funding.

 

   Schwarzenegger and Republican lawmakers were able to uphold their

vow of no new taxes with a series of accounting shifts, borrowing and

fund shifts. The state will extract $4.4 billion from local governments’

revenues — about $2.1 billion in borrowing by suspending Proposition

1A, $1.3 billion in redevelopment dollars, and $1 billion in transfers

from local gas taxes.

 

   Schwarzenegger also succeeded in having a proposal to expand oil

drilling off the Southern California coast for the first time in 40

years included in the budget agreement. Under that plan, drilling would

be allowed from an existing rig off the Santa Barbara coast, generating

about $1.8 billion in revenue.

 

   Some 200,000 state government employees already have been ordered

to take three days off a month without pay, the equivalent of a 14

percent pay cut. Those furloughs will continue through next June,

shutting many government offices for three Fridays a month.

 

   “This is a budget that has no tax increases and a budget that is

cutting spending,” Schwarzenegger said Monday. “We’re protecting

education and making government more efficient and cutting waste and

abuse. All around this is a really great achievement.”

 

   California’s latest budget crisis came less than five months after

negotiations resulted in tax increases and spending cuts to eradicate a

$42 billion budget shortfall. Since then, California’s deficit has

spiraled as soaring unemployment and one of the worst home foreclosure

crises in the United States have sent state revenues declining to levels

not seen since the 1990s.

 

   Personal income fell this year in California for the first time in

70 years, leading to a 34% plunge in income tax revenue during the first

half of the year. The $26.3 billion shortfall amounts to nearly 30% of

the state’s general fund, the account that pays for day-to-day state

services.

 

                  ** Market News International **

 

[TOPICS: M$$CR$,M$U$$$]


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