California Deficit May Widen by $1 Billion or More, Brown Says

California’s $9.2 billion budget deficit may widen by $1 billion or more because lawmakers resisted early spending cuts and lawsuits blocked other reductions, Governor Jerry Brown said.

Democrats who control the Legislature have balked at about $1 billion of reductions to social services and higher education that Brown proposed in January. He had wanted some of the spending cuts made by last month. Lawmakers have said they want to wait until revenue estimates are revised in May.

California, the most-indebted state, has fought deficits every year since 2007 as tax collections suffered from the longest recession since the 1930s. Brown has proposed more than $4 billion in cuts and wants voters to boost sales and income taxes that he said would raise about $7 billion a year. He’ll revise his budget estimates next month, once April tax collections are counted.

“It could be as much as a $1 billion, or more,” Brown told reporters who asked about the deficit following a speech to the California Medical Association yesterday in Sacramento. “It will be bigger than it was before because we’ve been stopped in the courts, by the federal government and by delays.”

“I laid out a proposal and it wasn’t accepted at the time, so now the challenge will grow,” the 74-year-old Democrat said. “Whether it’s one billion or a couple of billion, we will let you know in a couple of weeks.”

Built Into Budget

Brown built revenue from the tax increases into his spending plan for fiscal 2013 and inserted a provision that triggers $4.8 billion in cuts to schools if voters reject the higher levies. If the deficit does grow, lawmakers could agree to increase the cuts triggered midway through the year or approve additional reductions that would take effect July 1.

Taxes in the past nine months have lagged behind the governor’s plan by about $1 billion. April is when about 15 percent of all state income tax revenue is collected. This month through yesterday, the state has collected $1.95 billion; Brown’s budget calls for $9 billion.

The prospect that the state’s fiscal health is weakening hasn’t diminished the appetite for the state’s bonds.

When California sold $1.35 billion of debt April 12, Treasurer Bill Lockyer was able to price bonds maturing in 10 years at 73 basis points higher than a Bloomberg Fair Value index of top-rated municipal debt. The spread, or difference compared with AAA securities, hasn’t been that small since December 2008, according to data compiled by Bloomberg.

Third-Best Performer

California state and local bonds maturing in 10 years are the third-best performer this year, including price gains and interest, among 27 states tracked in a Standard & Poor’s index.

Brown reached a deal with California’s second-largest teachers union in March to merge his tax increase proposal with a version they offered, to eliminate competition on the ballot.

The agreement would ask voters to raise the sales tax, already the highest in the U.S., to 7.5 percent from 7.25 percent, and boost rates on income starting at $250,000. Those making $1 million or more, now taxed at 10.3 percent, would pay 13.3 percent, the most of any state.

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

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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