Brown Faces `Sack Full of Nasty' Even as Silicon Valley Group Backs Budget

California Governor Jerry Brown’s self-touted political acumen will be put to the test as his plan to erase a resurgent $25.4 billion deficit goes before the state Legislature.

Lawmakers in the capitol in Sacramento are scheduled to begin voting as early as tomorrow on his package of budget bills and companion measures that would slash spending by $12.5 billion and call a special election in June for voters to decide on extending more than $9.3 billion of tax increases.

Brown, a 72-year-old Democrat, is facing resistance from Republicans who oppose the tax extensions. While the governor won the backing yesterday of a Silicon Valley business group, Brown’s credibility is on the line if the package fails after he promised voters he could solve California’s recurrent budget crises without gutting public education, said Jack Pitney, a political science professor at Claremont McKenna College.

“That’s a sack full of nasty,” said Pitney at the college in Claremont, California. “On one hand, he doesn’t get any credit for legislative skills and he doesn’t bridge the partisan divide as promised. And then he has to tell a state full of parents that their kids’ class sizes are going to increase dramatically.”

Photographer: Ken James/Bloomberg

Jerry Brown, governor of California. Close

Jerry Brown, governor of California.

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Photographer: Ken James/Bloomberg

Jerry Brown, governor of California.

U.S. governors face deficits totaling as much as $125 billion in the coming fiscal year, according to the Washington- based Center on Budget and Policy Priorities. California’s financial strains have left it with the biggest deficit among the states and the lowest credit rating. With an economy bigger than Russia’s, California has fought its way through a combined $100 billion of shortfalls in the past three years.

Courting Business Backing

Part of Brown’s strategy has been to court business leaders to help sway Republicans, whose support he will need to get a two-thirds majority in both chambers of the Legislature for calling the special election.

The Silicon Valley Leadership Group, whose more than 300 members include Google Inc. (GOOG) and Stanford University, said broad tax increases are preferable to targeted levies that would harm individual industries or income groups.

“Painful cuts as well as those temporary tax extensions for five years are core to finding common ground,” Carl Guardino, president of the Silicon Valley group, said yesterday after endorsing Brown’s proposal. “If it’s important for California, then we should all have skin in the game.”

Chamber of Commerce

The California Chamber of Commerce said it would back lawmakers who may face criticism from anti-tax groups for agreeing to Brown’s tax-extension plan. The 15,000-member organization, based in Sacramento, hasn’t endorsed the governor’s budget.

“This will provide for a balanced budget for the foreseeable future,” said Allan Zaremberg, the group’s president, in a telephone interview. “That will provide the certainty that’s going to lead to more investment in California.”

State law-enforcement leaders two days earlier backed a cornerstone of Brown’s plan that calls for shifting public safety and welfare programs to local governments. Money from the tax extensions would finance that change for the first five years.

The tension over the budget and the showdown in the Legislature have helped push the extra yield that buyers want for 10-year California bonds up almost 10 percent since the one- year low on Jan. 17 to 136 basis points, compared with top-rated municipal debt, according to a Bloomberg Valuation index. A basis point is 0.01 percentage point.

Tax-Increase Extensions

Brown, who was governor from 1975 to 1983, proposed asking voters to retain a 0.25 percentage-point increase in personal income-tax rates; a 1 percentage-point boost in the retail-sales tax rate, to 8.25 percent; an increase in the rate for auto- registration fees of 0.5 percentage point, to 1.15 percent of a vehicle’s value; and a reduction of the state’s child tax credit to $99 from $309.

The taxes were raised in 2009 when former Governor Arnold Schwarzenegger and lawmakers faced a $42 billion deficit. They are set to expire this year, and Brown proposes to retain them for five more.

If the tax increases aren’t extended, Brown has vowed to cut even more to close a deficit that’s equal to 20 percent of discretionary spending in a total budget of $84.6 billion. Further spending reductions would have to come from schools and police protection, he said.

Budget Deadline

Brown urged lawmakers to approve his plan by March 10 or soon thereafter to give officials the three-month lead time they need prepare for the special election. He said he wants to know the outcome of that vote before the constitutional deadline of June 15 for the Legislature to send him a budget. Last year’s financial plan was passed a record 100 days into the fiscal year, which begins July 1.

The governor’s budget has drawn opposition from some Democrats. They disagree with the scope of cuts including $1.7 billion from health care for the poor, $1.5 billion from welfare and $1.4 billion from public universities and community colleges.

Republicans propose to limit spending, according to their position papers, legislation and interviews. One notion is to develop a formula tied to inflation and population, or some other benchmark, and set aside a portion of any excess revenue in good years into a rainy-day fund for times when the economy sours and revenue declines.

Spending Cap

Similar caps offered in the past met with resistance from Democrats, public worker unions and advocates for school and welfare funding. Democrats have said they’re open to discussing a less restrictive cap, such as limiting spending during the five years of the temporary tax extension.

The Republicans also have said they want to reduce benefits for government workers, citing the growing cost of pensions. Some would dismantle the current system that guarantees benefit levels regardless of investment returns, replacing it with a hybrid that includes elements of a traditional plan and a 401(k) account where beneficiaries bear more of the investment risk.

Some Democrats say a hybrid plan is off the table and that steps to curtail perceived pension abuses should be bargained with the unions.

Brown met yesterday with five Republican senators who the day before had declared negotiations were at an impasse to work on a possible compromise involving those issues.

Open Door

“He is maintaining an open door policy and is continuing to talk to legislators on both sides of the isle,” Gil Duran, a Brown spokesman, said in a telephone interview.

California shares with Illinois the lowest credit rating of any state from Moody’s Investors Service. The A1 grade is Moody’s fifth-highest. Standard & Poor’s rates California A-, its fourth-lowest level for investment-quality securities.

“Investors are truly concerned,” said Don Backstrom, a managing director and principal of Backstrom McCarley Berry & Co., a San Francisco-based municipal bond underwriter. “They are telling us that they are concerned about how this is going to turn out.”

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net

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

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