California Budget Impasse Set to Break Record Length

California is poised this week to break its record of going 85 days without a budget as Governor Arnold Schwarzenegger and lawmakers remain at odds over closing a $19 billion deficit in the most populous U.S. state.

“We can solve this in three seconds if the Democrats wanted to cut enough so the state could live within its means,” the 63-year-old Republican said in an interview before meeting with legislators in his Santa Monica office today.

“The second that happens, we could have a budget,” he said. “It’s a very difficult time for all of us.”

Lawmakers adjourned at the end of last month and haven’t scheduled a vote on the budget. The last time California had gone this long without a spending plan was on Sept. 23, 2008, when Schwarzenegger signed an accord a week after it was approved by legislators.

California, the biggest U.S. issuer of municipal debt, has missed its constitutional deadline to have a budget by the July 1 start of its fiscal year in all except four of the last 20 years. Budgets and tax increases require approval by a two-thirds vote of the Legislature, a so-called supermajority that neither the Republicans nor the Democrats can muster.

“The two-thirds supermajority required for budget passage basically sets them up each and every year to fail persistently like this,” said Guy LeBas, a fixed-income strategist with Janney Montgomery Scott, a financial advisory firm based in Philadelphia.

Rating Threat

At issue this year is how to best erase the resurgent deficit brought on by the recession that cut into state revenue. Schwarzenegger and Republicans want to dismantle the state’s main welfare program and slash $12.4 billion of spending. Democrats proposed $5.9 billion in higher taxes and fees combined with $8 billion of spending cuts.

The state’s credit grade may be cut if the stalemate continues for several months or more, Standard & Poor’s said in June. S&P rates the state A-, its fourth-lowest investment grade and the lowest among its peers. A lower rating may add to California’s borrowing costs. The extra yield investors demand on 10-year California bonds fell from 1.53 percentage points above AAA rated municipal securities Dec. 9 to 1.21 percentage points yesterday, Bloomberg Fair Value Index data show.

Schwarzenegger is demanding lawmakers roll back pension benefits for state workers to 1999 levels and agree to ask voters to approve spending curbs and the creation of a rainy-day fund.

IOU Alert

“It’s unfortunate that the Legislature has gone this long without a budget, but we absolutely will not just solve the short-term problem in front of us without addressing the pension and budget reforms so we don’t go through this again,” said Schwarzenegger’s spokesman, Aaron McLear.

California Controller John Chiang has warned that unless a compromise is reached soon he might have to once again resort to paying state bills with IOUs as soon as next month to ensure he has enough money to pay priority obligations such as debt service.

“It’s maddening and frustrating to be more than 80 days into the fiscal year without a budget,” said Senate President Darrell Steinberg, a Democrat from Sacramento. “We’re close to an agreement and I am hopeful a deal that is fiscally responsible, funds education at the highest level possible, and doesn’t shred the already delicate safety net, can come together soon.”

In 2009, two back-to-back impasses ended only after Schwarzenegger and lawmakers agreed to cut $32 billion from spending and raise taxes by $12.5 billion. He has vowed not to raise taxes again.

Compromise Call

The governor “needs to get together and work out a compromise,” said Kevin Richards, 58, an unemployed construction worker standing outside Schwarzenegger’s Santa Monica office.

“He can’t get anything done and I end up on the street,” said Richards, who said he once supported the governor and lost his unemployment benefits two months ago. “I’ve got sand in my hair from sleeping on the beach.”

After a budget agreement, California plans to issue as much as $10 billion in short-term notes. Schwarzenegger’s Department of Finance has identified about $6 billion of bonding needs for the period from the budget’s resolution to the end of November.

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

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