California Democrats Attempt to Bypass Two-thirds Rule Amid Impasse
The Assembly last night began passing a $23 billion package of tax increases, spending cuts and accounting maneuvers by a simple majority rather than the required two-thirds vote. The Democrats argued that the tax bills needed only a simple majority because they cut some taxes, while increasing others in equal amount and raised fees that dont require the two-thirds approval requirement.
Governor Arnold Schwarzenegger, a 61-year-old Republican, vowed to veto the plan if it reaches his desk and Democrats dont have enough votes to override. He vetoed a similar proposal in December and has promised to reject again any bill that raises taxes to fill the gap. The spending cuts require a two-thirds vote in order to take effect immediately. Under a simple majority vote, the cuts take effect in 90 days.
“He will absolutely veto,” Schwarzenegger Press Secretary Aaron McLear said of the simple majority package. “If the Legislature spent as much time working to solve the problem as they do on floor drills wed be a lot closer to a deal.”
California, a state that is the equivalent to the eighth largest economy in the world, will likely run out of cash in July after the national recession sapped expected tax revenue by more than 20 percent in the fiscal year that ends June 30.
Spending Cuts or Tax Hikes
Democrats, who control the legislature, are at an impasse with Republicans and Schwarzenegger over whether to make up the difference with spending cuts or tax increases. Absent a fix by July 1, the state will begin issuing IOUs to pay bills.
The Assembly was scheduled to remain in session past midnight California time, taking up and debating the 14 bills that are part of their majority-vote package. The Senate was scheduled to take up the bills today.
“We are facing the real prospect of running out of cash here in California,” said Assemblyman Chuck DeVore, an Irvine Republican. “What we are dealing with here is an utter lack of compromise.”
Republicans argued that the measures violate Californias Constitution, which requires all taxes be approved by a two thirds vote.
The impasse, combined with the severity of the decline in the states economy, led Fitch Ratings on July 25 to lower Californias credit rating to A- from A.
California 5 percent tax-exempt bonds due in 2037 sold to a customer in a $1 million-plus block last week at about 83.5 cents on the dollar to yield 6.25 percent, according to Municipal Securities Rulemaking Board trade data. Thats down from 87.3 cents and 5.93 percent on June 9.
The states $59 billion of debt is rated A2 by Moodys Investors Service, five steps above non-investment grade, and a comparable A by Standard & Poors. Both of those companies have also warned of reductions if lawmakers dont quickly act.
Lawmakers ended a similar impasse in February after four months, when they struck a deal to temporarily raise $12 billion in taxes and cut spending by $16 billion to help close what was then a $42 billion deficit. One-time funds, accounting maneuvers and federal stimulus money filled most of the rest.
Part of that package was a ballot measure asking voters to approve the sale of $5 billion of bonds backed by state lottery proceeds. The measure was rejected during a special election May 19. That added $5 billion to the current shortfall.
Cuts Versus Taxes
Schwarzenegger and Republicans want to cut as much as $19 billion in spending, including scrapping entire welfare programs, removing nearly 1 million low-income children from the states healthcare for the poor program and shutting down 80 percent of the state parks. Democrats proposed raising taxes on cigarettes and oil drilled in the state, and adding $15 to the cost of registering a car and dedicating that fee to paying for parks.
Without a balanced spending plan, California Controller John Chiang and Treasurer Bill Lockyer have said, the state will have difficulty securing the short-term loans needed to fund the government until the bulk of tax collections come in later during the fiscal year.
Chiang is preparing to begin issuing IOUs to pay about $3 billion of bills beginning July 2 absent an agreement in the Legislature. It would be only the second time since the Great Depression that the state has had to pay its bills with IOUS.