Brown Calls for $8.3 Billion Cuts to Close Wider Deficit

California Governor Jerry Brown, confronting a widening $15.7 billion deficit, proposed a four- day government workweek to reduce pay and more cuts in spending on welfare and indigent medical care.

A reduction to 38 hours in a four-day week, from 40 hours in five days, would cut pay 5 percent, for a savings of $400 million, Brown said. He’d slice $1.2 billion from healthcare for the poor, $1.1 billion from welfare and in-home help for the elderly and disabled, and $500 million from courts.

The deficit grew after he overestimated tax revenue by $4.3 billion when he proposed his budget in January, the governor said today. At the same time, some cost savings in the current year’s budget have been blocked by the federal government and judges, while Democrats in the Legislature resisted other reductions.

“You never can quite get it right because in our particular free-enterprise system -- a free flow of capital -- stuff moves and it goes up and down,” the 74-year-old Democrat told reporters in Sacramento. “Even Jamie Dimon just blew $2 billion. That’s a big risk. We all have to live with the uncertainties of the business cycle, but we do our best.”

One Million Jobs

California, with the world’s ninth-biggest economy, lost more than 1 million jobs in the recession that started in 2007, reducing the most populous U.S. state’s revenue by 24 percent. The new deficit estimate increases the urgency of Brown’s call to boost income taxes on top earners to the highest in the nation, and raise sales levies that now top all states. Without the taxes, he said he’d cut another $6 billion, most of it from schools, midway through the year.

For the last four years, California lawmakers have trimmed spending and temporarily raised taxes to combat deficits of more than $100 billion combined. Deeper cuts now threaten to shred safety nets for the poor, elderly and disabled, reduce subsidies to the state’s renowned universities and strain funding for public safety and schools.

Brown’s new plan would reduce state spending by $8.3 billion, though less than half would come from cuts in services.

For instance, he would siphon $292 million from California’s share of a $25 billion national mortgage-relief settlement reached with Bank of America Corp., JPMorgan Chase & Co. (JPM) and three other U.S. banks to end a probe of abusive foreclosure practices stemming from the collapse of the housing bubble. He would use that money to pay for homeowner assistance programs now financed through the general fund, allowing him to count that amount as a savings.

School Spending

School spending would increase as required by law, though by $1.5 billion less than previously planned, so he counts that as a reduction. He also plans to take $1.4 billion of the cash assets from the state’s now defunct redevelopment agencies and give it to schools to reduce the state’s obligation to fund education by that amount.

“I said in the beginning, when I ran for this job, that it’s taken a long time, nearly a decade, to get into this mess,” Brown said at a briefing for reporters in Sacramento. “We’re not going to get out of it in a year.”

The state’s sinking finances may threaten its chances for a higher credit grade. California is Standard & Poor’s lowest- rated state, at A-, six levels below AAA. While the company raised its outlook to positive in February, a larger deficit will “test the Legislature’s commitment to a stronger fiscal position as a public-policy priority,” Gabriel Petek, an S&P analyst in San Francisco, said May 1 in a report.

Bond Trading

A California bond due in 10 years traded today at a yield of 2.45 percent, or about 0.68 percentage point above an index of similar-maturity muni debt with a top rating, according to data compiled by Bloomberg. It was issued in March at a yield of 2.78 percent, or 0.87 percentage point above the benchmark.

It costs the annual equivalent of about $232,000 to protect $10 million of California debt against default for 10 years, compared with about $496,000 for Spain, data compiled by CMA show.

The initiative for higher taxes is the linchpin of Brown’s budget-balancing plan. His campaign has begun handing in more than 1.3 million signatures to county election offices to qualify the measure for the ballot.

The plan would temporarily raise the statewide sales tax, already the highest in the U.S., to 7.5 percent from 7.25 percent. It would also 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.

California’s constitution requires legislators to pass a budget by June 15 with a simple majority vote. Democrats control the Senate and the Assembly, though they don’t hold enough seats to pass a tax increase, which requires two-thirds approval. A voter initiative passed in 2010 strips lawmakers of their pay for every day they’re late. Brown has until July 1 to enact the plan.

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; Alison Vekshin in San Francisco at avekshin@bloomberg.net; James Nash in Los Angeles at jnash24@bloomberg.net

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

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