Schwarzenegger, California Lawmakers Agree on Budget Compromise

California lawmakers and Governor Arnold Schwarzenegger agreed on a “framework” to close a $19 billion deficit, ending an impasse that pushed the most-populous U.S. state near insolvency for a second year running.

The group will hammer out the details of the agreement when they meet again in Sacramento on Sept. 27, said Schwarzenegger Press Secretary Aaron McLear. He declined to give specifics on their plan.

“The governor and legislative leaders have reached the framework of an agreement, will work through the details over the weekend, and hope to come to a final agreement when they reconvene Monday,” McLear said.

California, the biggest U.S. issuer of municipal debt, has been operating without a budget since its fiscal year began July 1, the longest the state’s ever gone without a spending plan. Schwarzenegger, a Republican approaching the end of his term, and Democrats who lead the Legislature, disagreed on how much spending to cut and whether to raise taxes to fill the gap. The stalemate led state Controller John Chiang to warn that he may have to begin paying some bills with IOUs as soon as next month.

‘Stark Choices’

“Given the enormity of the deficit and the stark choices available to us in closing it, it’s vital that we take the time to get it right in producing a budget plan that protects Californians from devastating job losses and economically hurtful decisions,” said Speaker of the Assembly John Perez, a Democrat from Los Angeles.

Once a budget is signed, California Treasurer Bill Lockyer plans to borrow as much as $10 billion using short-term notes. The state typically seeks such financing in the second or third quarter each year, when cash-on-hand is low, and repays it from later tax collections. The state sold $8.8 billion of such notes in September 2009 and paid off the securities in June.

Schwarzenegger’s Department of Finance has identified about $6 billion of bonding needs through the end of November. Lockyer has been waiting to sell the debt pending approval of a budget. He sold $12 billion of securities in October and November last year after a similar stalemate ended. The state sold more than $30 billion of debt last year.

Fair Amount

“Once we get a budget, California is going to need to do a fair amount of issuing, and they’ll have to do that at a higher rate,” Scott Minerd, chief investment officer of Guggenheim Partners, said in a Sept. 17 telephone interview from his Los Angeles office. “There will be buying opportunities.”

In January, Standard & Poor’s cut California’s credit grade to A-, its lowest among U.S. states, citing fiscal imbalances and recurring cash-flow problems. S&P has said it may reduce the state’s rating again if the budget crisis worsens.

Any progress on a budget agreement “is welcome news,” said Garin Casaleggio, a spokesman for Chiang, in a statement. The amount the state owes to organizations including community colleges and local governments has swelled to about $6.5 billion since July 1, he said.

California last sold general-fund backed bonds in June, when it offered about $120 million of debt for veterans’ homes. The state sold $450 million of public-works bonds in May and $5.9 billion of debt in March.

Extra Yield

Even with the impasse, the extra yield investors demand on 10-year California bonds has declined to 119 basis points above AAA rated municipal securities from 150 basis points in March, Bloomberg Fair Value Index data show. A basis point is 0.01 percentage point.

“The way munis have priced so far this year, they have responded far more to the technical factors than to the underlying credit,” said Jon Schotz, co-managing partner at Saybrook Capital in Santa Monica, California. “So much money has gone into munis this year that funds tend to lose their discipline.”

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. That has forced lawmakers to agree on a plan before bringing it up for a vote.

The state’s constitution says lawmakers must send a budget to the governor by June 15, a deadline they’ve met five times in the last 30 years. The fiscal 2008 budget was sent to Schwarzenegger on Sept. 16 and signed into law on Sept. 23, the latest the state went without a spending plan until this year.

The state, with the world’s eighth-largest economy, issued $2.6 billion of IOUs last year after a similar budget stalemate. That was only the second time since the Great Depression that California had to use warrants to cover costs and conserve cash.

To contact the reporters on this story: Michael Marois in Sacramento at mmarois@bloomberg.net. Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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