Schwarzeneggers Final Budget Fight Starts as Currency Emergency Looms
Schwarzenegger, a 62-year-old Republican, has said he wont raise taxes again to fill gaps of $6.6 billion in the current year and $13.3 billion in the 12 months beginning July 1. Amid warnings of a possible “cash crisis,” hes also pledged to ease the cost to taxpayers of federally mandated programs such as health care for the poor.
“Theres little indication as to how they are going to eliminate these large structural deficits,” said David Blair, an analyst for Pacific Investment Management Co. in Newport Beach, California, which holds $24 billion in municipal bonds. “Thats going to continue to weigh on the bonds.”
California is among states hit hardest by the housing-led recession, which reduced its tax collections by driving the jobless rate to 12.3 percent, trailing only Michigan and Rhode Island. Even with a sales-tax increase passed in February, total revenue dropped by $2.3 billion, or 7 percent, in the five months through November from a year earlier.
The governors proposal is the starting point for negotiations with the Legislature. For bondholders, a key issue will be whether the budget that ultimately passes relies heavily on short-term borrowing and leaves deficits for Schwarzeneggers successor, which may put further pressure on the states credit rating. Californias A rating from Standard & Poors is the lowest among U.S. states.
Battered Finances
The economy has continued to batter the states finances, even after lawmakers erased $60 billion in gaps in the past two years by raising taxes, borrowing and slashing school spending after legislative battles pushed the state close to insolvency.
Schwarzenegger told lawmakers yesterday he will introduce a $500 million package to help create 100,000 jobs and train as many as 140,000 workers. He also said he wants the Democrat- controlled Legislature to extend tax credits of as much as $10,000 for buyers of new and existing homes.
“The first priority for the coming year is the economy and jobs,” Schwarzenegger said in his final State of the State address yesterday in Sacramento. “As long as government keeps the engine oiled with prudent policies — and more importantly, does not pour sand in its gears — this state will persevere and prosper.”
Pension System
Schwarzenegger also renewed calls to alter the pension system for new state workers, said he will seek a greater share of money from Washington to cover the cost of federally mandated programs, and said turning over jails to private corporations would save the state “billions.”
Californias politicians have struggled over the budget in part because they need a two-thirds majority for spending plans or tax increases.
Last year, a stalemate in the Legislature over the budget drained the state of cash. In July, Controller John Chiang resorted to issuing $2.6 billion of IOUs. The move was aimed at conserving cash for expenses, including interest on bonds, given highest priority under the law. Chiang, a Democrat, said another cash crunch may erupt this year.
Cash Crisis
“We are going to have a cash crisis this summer if the governor and the Legislature do not take immediate action to implement a sound budget solution,” Chiang said in an interview yesterday after the speech.
California is the largest issuer of municipal debt, and investors have demanded higher rates on its obligations than top-rated borrowers. The added interest on 30-year securities amounts to 1.14 percentage point, or 114 basis points, according to data compiled by Bloomberg, compared with as little as 0.19 percentage point in September 2008. The state sold $21 billion of new debt in 2009.
Schwarzenegger was elected in 2003 and cant run for office again because of term limits. He faces a challenge this year because he wont be able to resort to one-time measures, such as federal cash and borrowing from local governments, steps that provided a third of the fixes last year, according to the Legislative Analysts Office.