California Governor Arnold Schwarzenegger and top lawmakers agreed on a “framework” to close a $19 billion deficit that left the most-populous U.S. state without a budget for almost three months.
The governor and the Democratic and Republican leaders of the Senate and the Assembly, known as the Big Five, will hammer out the details at a meeting in Sacramento on Sept. 27, said Aaron McLear, Schwarzenegger’s press secretary. Details of the draft accord weren’t made public.
“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 after the group met yesterday in Los Angeles.
California, the biggest U.S. issuer of municipal debt, has been operating without a budget since its fiscal year began July 1, the longest it’s ever gone without a spending plan. It is the only U.S. state still without a budget. Schwarzenegger, a Republican approaching the end of his term, and Democrats who hold a majority in the Legislature, disagreed on how much spending to cut and whether to raise taxes to fill the gap.
The framework must still be brought to each party’s respective caucuses for agreement. Then votes in the upper and lower chambers would follow, possibly within the next two weeks.
Schwarzenegger and Republicans wanted 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 stalemate led state Controller John Chiang to warn that he may have to begin paying some bills with IOUs as soon as next month.
“We have a framework of a budget with the expectation of closing on Monday,” said Senate President Darrell Steinberg, a Democrat from Sacramento.
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.
“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.”
Lockyer’s office said leaders ought to complete a budget by the end of next week to allow time to sell the bonds needed to keep funding public works projects.
That’s because of a self-imposed “dark period” in December and early January, when Lockyer typically doesn’t sell debt while new economic data are prepared, along with a new budget proposal for the coming fiscal year. The governor must deliver the new spending plan to the Legislature in the second week of January.
“We’re getting very pinched here,” Joe DeAnda, Lockyer’s spokesman, said yesterday. “If we go much longer without a budget, it severely compromises our ability to get to market and keep those projects going.”
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.
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.
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.
Yields were driven to record lows as investors sought the perceived safety of the municipal market amid concern the economic recovery is losing momentum. Yields on top-rated municipal bonds maturing in 10 years have declined to to 2.55 percent yesterday from 3.36 percent on April 9, according to data compiled by Bloomberg.
“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, who oversees $500 million in municipal bonds. “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.