California Deficit May Reach $28 Billion as IOUs Loom

California Governor-elect Jerry Brown
California Governor-elect Jerry Brown. Photographer: David Paul Morris/Getty Images

California’s budget gap may widen to $28.1 billion over 18 months, according to Governor-elect Jerry Brown, who takes charge of the most-populous U.S. state next month. A cash shortage may force the use of IOUs by July, Controller John Chiang said.

The deficit estimate takes into account a $2.7 billion drop in projected estate-tax receipts, and compares with the most recent forecast of a $25 billion gap for the period, Brown said today at a public meeting of state officials. The cash accounts may be short by $2.3 billion within eight months, Chiang said at the meeting in Sacramento.

“I don’t want to say it, but this could mean IOUs and more tax-refund deferrals,” Chiang said.

Chiang, who contemplated the use of warrants this year amid a record 100-day budget impasse, issued $2.6 billion of the IOUs to vendors in July 2009 while waiting for lawmakers to pass a spending plan. Brown, a Democrat who takes office Jan. 3, faces a widening gap after negotiators closed a $19 billion deficit for the current fiscal year, which ends in June.

Chiang projected that the cash shortage will deepen to $3.5 billion in August and $4.6 billion by September. He said he’ll have a better sense of the state’s cash position once Brown proposes a budget, due next month.

‘Serious’ Crisis

“California is facing a very serious budget crisis,” Brown said. “This latest increase comes from actions that are taking place in the Congress that will have an effect on California.”

In an accord with Republican congressional leaders to extend tax breaks enacted in 2001 and 2003, President Barack Obama proposed making the top estate-tax rate 35 percent. If that rate goes into effect next year, it will be the lowest since 1931, except for this year, when the levy was suspended.

The new estate-tax structure also would exclude the first $10 million of a couple’s wealth. Current law sets the tax rate at 55 percent next year, with an $8 million exemption per couple. The lower rate would hold through 2012 under the tax agreement negotiated in Washington.

Republican Governor Arnold Schwarzenegger, who couldn’t seek re-election because of term limits, and lawmakers closed this year’s gap on Oct. 8.

Standard & Poor’s rates California general-obligation debt A-, its fourth-lowest investment grade and lowest of any state. Moody’s Investors Service gives it an A1, one step higher and the same as it gives to Illinois.

The extra yield investors demand above top-rated debt for 30-year general obligations from California issuers reached 105 basis points yesterday, the most since the budget was enacted in October, Bloomberg Fair Market Value data show. A basis point is 0.01 percentage point.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE