California Gap May Rise to $25.4 Billion, Report Says

California, the most populous U.S. state, may face a $25.4 billion budget deficit over the next 19 months, the fourth time in as many years the state has confronted a spending gap, its fiscal analyst said.

The deficit includes $6.1 billion in the current fiscal year, which ends June 30, and about $19 billion the next year, according to a report released today by the nonpartisan Legislative Analyst’s Office. Governor-elect Jerry Brown, who will be sworn in Jan. 3, must propose a plan to erase the deficit by Jan. 10. The report warned against “patching over” shortfalls with temporary fixes.

“Unless plans are put in place to begin tackling the ongoing budget problem, it will continue to be difficult for the state to address fundamental public-sector goals -- such as rebuilding aging infrastructure, addressing massive retirement liabilities, maintaining service levels of high-priority government programs and improving the state’s tax system,” the report said.

Governor Arnold Schwarzenegger and lawmakers last month passed an $86.6 billion budget for the current fiscal year -- a record 100 days late -- amid an impasse over how to eliminate a $19 billion shortfall. Voters Nov. 2 approved a ballot measure lowering the margin needed to pass a budget from a two-thirds majority to a simple majority. Tax and fee increases still need a supermajority.

Temporary Fixes

The Legislative Analyst’s Office said the state is unlikely to secure $3.5 billion of the $5.3 billion in federal funds Schwarzenegger and lawmakers included in their budget. Half of the shortfall next fiscal year is the result of temporary fixes put in place in the past two years, including $8 billion in tax increases set to expire.

In the report, Legislative Analyst Mac Taylor said California is likely to face deficits of about $20 billion each year through 2015.

A call to Brown’s deputy communications director, Evan Westrup, wasn’t immediately returned.

Brown said the day after he won election that voters don’t appear open to higher taxes to fix the budget, citing the rejection of an $18 increase in vehicle-registration fees that would have been used for state parks.

That means he’ll have to work with Democratic-controlled Legislature for further spending cuts on top of the $8 billion that were part the current year’s deficit-reduction plan and the more than $30 billion slashed in the previous two years.

Bond Sale

The new deficit figure comes as the state is preparing to sell about $14 billion of long- and short-term debt during the next two weeks. Standard & Poor’s rates California general-obligation debt A-, its fourth-lowest investment grade and the worst rating among states. Moody’s Investors Service gives it an A1, six steps above speculative grade, and Fitch Ratings also ranks California A-.

The extra yield that investors demand to hold 10-year general-obligation debt from California issuers instead of top-rated tax-exempt bonds declined to 122 basis points yesterday, according to Bloomberg Fair Market Value data. A basis point is 0.01 percentage point.