June 27 (Bloomberg) -- California lumbers toward a new fiscal year this week without a budget, tripped up by Governor Jerry Brown’s failure so far to win over enough Republicans to extend expiring taxes.
At issue is how to erase a $10 billion deficit for the year beginning July 1, the remnant of a $26 billion budget gap the state faced in January. Spending cuts passed in March and better-than-projected revenue narrowed the shortfall. Without a budget, the biggest issuer of municipal debt in the U.S. is unable to borrow on Wall Street to pay bills.
Brown, a 73-year-old Democrat, took office in January on a promise to use his decades of political experience and legislative acumen to correct the state’s fiscal ills. Just four Republican legislators are keeping Brown and Democrats from the two-thirds majority vote needed to decide tax measures.
“Brown can bring wisdom and experience to the table, but he cannot change basic arithmetic,” said Jack Pitney, who teaches political science at Claremont McKenna College in Claremont, California. “To balance the budget, politicians either have to cut spending or raise taxes, which they hate to do.”
Brown wants to extend temporarily more than $9 billion of tax and fee increases expiring June 30 until he can ask voters to retain them in a statewide ballot. If the taxes are allowed to run out, Brown would need to ask lawmakers and voters to increase taxes, not just preserve existing ones. Both the so-called bridge tax and the ballot measure need a two-thirds vote of the legislature.
Without the tax revenue, Brown has warned the state faces deeper cuts to schools and public safety. Late last week he said he’s holding out hope that a deal can be reached, though he indicated it could take a “few weeks.”
“I’m not giving up,” Brown told reporters in San Francisco on June 23. “I’m going to keep working until we get those tax extensions. And we will get them, one way or the other.”
Republicans say they won’t agree to temporarily extend the taxes, and will only approve a statewide ballot measure if Democrats agree to additional referendums on curbing public employee pensions, business and environmental regulations and a new cap on state spending.
“His plan to pick off Republicans has failed,” said Assembly Republican Leader Connie Conway.
Democrats on June 15 sent Brown a budget without the tax revenue, filling the gap with one-time accounting maneuvers such as delaying for three months money promised to schools and counting on rosy revenue projections. Brown vetoed the plan the following day, saying it employed the kind of gimmicks and accounting maneuvers he promised he wouldn’t use.
Controller John Chiang then ruled that lawmakers will permanently forfeit their salaries, along with $142 a day in expenses, until they send Brown a properly balanced budget, a penalty set in a ballot proposition approved by voters in November. If that doesn’t happen by June 30, their next payday, they’ll get a check for only half the month, he said.
“The Chiang decision is a big cup of caffeine,” Pitney said. “It’s the political equivalent of a quad espresso. It’s waking politicians up and getting them very nervous. Negotiations will go faster than they would have otherwise, but they won’t be peaceful. Desperate politicians are not placid souls.”
Brown is also facing resistance from labor unions, traditional supporters of Democrats, over the pension reforms.
Republicans want a ballot measure that would dismantle the existing state pension system that guarantees benefit levels regardless of investment returns. Instead, they propose a hybrid that includes elements of a traditional defined-benefit plan and a 401(k) savings account, where recipients bear more of the investment risk.
“If Republicans want to do away with the pension systems and gut retirements to state workers and municipal workers as a permanent solution in exchange for the possibility of temporary tax extensions, then I don’t think that is something we would support,” said Steve Smith, a spokesman for the California Labor Federation.
California needs a budget in place in order to sell a projected $7 billion in revenue anticipation notes, or RANS, short-term municipal bonds the state offers annually when cash is low. The debt is repaid from later tax collections. Chiang says the state isn’t in dire need of cash yet, but a prolonged impasse could force him to issue IOUs to pay bills as he did in 2009.
Without a budget by July 1, the controller also can’t pay lawmakers and the more than 1,000 legislative workers and gubernatorial appointees. They would get any money owed once the spending plan is signed. Absent a spending plan, Chiang also can’t pay vendors who sell goods and services to the state and community colleges, health clinics, foster care parents, nursing homes and daycare centers that receive state subsidies.
Brown and Democrats are working to craft an alternative budget they could pass without Republican support.
When asked if the governor’s push tax extensions are dead, Senate President Pro Tem Darrell Steinberg told San Francisco’s KQED radio: “You know, I’ll leave it to the governor to announce the wake and the funeral services.”
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