California Lawmakers Reject Dueling Budgets as Impasse Persists
Arnold Schwarzenegger, governor of California
Ken James/Bloomberg
Arnold Schwarzenegger, governor of California.
Arnold Schwarzenegger, governor of California. Photographer: Ken James/Bloomberg
California lawmakers rejected competing budget proposals by Republicans and Democrats as they remain at odds on how to close a $19.1 billion deficit and keep the state from running short of cash next month.
Lawmakers from both parties acknowledged before yesterday’s votes that their proposals would fail amid the stalemate. Republicans led by Governor Arnold Schwarzenegger want to dismantle the state’s main welfare program and slash $12.4 billion of spending. Democrats proposed $5.9 billion in higher levies combined with spending cuts.
The votes, on the last day of the legislative session, sent the impasse into its third month. California hasn’t had a budget since the fiscal year began on July 1. Controller John Chiang, a Democrat, has said he may need to issue IOUs to pay bills for the second straight year if the standoff goes deep into next month. Standard & Poor’s has said it may cut California’s A- credit grade, the lowest among states, if the crisis worsens.
“Why they put them up for a vote, nobody knows,” Schwarzenegger said yesterday at a meeting of the San Francisco Chamber of Commerce. “After they go through this Kabuki, they, the Democrats and Republicans, will come back into the office and the negotiations will continue.”
The extra yield investors demand to own 10-year California bonds stood at 123 basis points above those of AAA rated municipal securities yesterday, a one-month high, according to Bloomberg Fair Value Index data. That’s still less than the 171 basis-point spread the bonds reached on July 1, 2009, just before the state began issuing IOUs amid a similar budget standoff. A basis point is 0.01 percentage point.
Lacking a Supermajority
California requires a two-thirds vote in both legislative chambers to pass budgets, and neither Republicans nor Democrats hold enough seats to meet that threshold on their own.
Schwarzenegger, who will leave office in January because of term limits, has been meeting with Democratic and Republican leaders separately for weeks trying to reach a compromise. He met last week with all top legislators together in the first such gathering since June.
“This drill was a show to make it look as though the Legislature is approaching the budget with some sense of urgency,” said Assemblyman Jim Silva, a Republican from Huntington Beach. “But after two months, the majority party still insists upon excessive tax increases and refuses to significantly cut spending.”
Past Delays
California’s constitution requires lawmakers to send a budget to the governor by June 15, a deadline they’ve made five times in the last 30 years. The 2008 budget was enacted 85 days into the fiscal year, the latest ever. The second latest was signed into law Sept. 5, 2003.
Absent a budget, the state can’t sell the short-term notes it typically uses each year to bridge cash shortages, because an approved spending plan must provide for repayment of the debt.
To ensure there’s enough money on hand to pay bondholders, state finance officers said Aug. 23 that next month they would delay paying $2.9 billion of subsidies to schools and counties, instead of waiting until October to make the deferrals. The move may help the state meet four major payments in October, totaling about $1.74 billion, that include $803 million in interest on general-obligation bonds, according to budget officials.
In addition to spending cuts, Schwarzenegger’s proposal projected $3.4 billion in additional federal aid and called for $3.4 billion in fund transfers, fees and assessments.
Democrat Plan
Democrats proposed increasing income taxes and reducing the state’s sales tax, which they say will net as much as $1.8 billion to help cover the deficit. They also proposed slashing $8 billion of spending and raising another $4.1 billion through a new levy on oil production, higher vehicle-registration fees and by suspending corporate tax breaks.
Schwarzenegger plans to embark on a trade mission to Asia from Sept. 9-15, with visits to China, Korea and Japan, even if the budget impasse remains unresolved.
“The Legislature’s failure to do their job isn’t going to prevent us from doing our job,” said Aaron McLear, a Schwarzenegger spokesman. “The budget is important, but creating jobs for California is equally important.”
To contact the reporter on this story: Michael Marois in Sacramento at mmarois@bloomberg.net.
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