Friday, July 17, 2009

CALIFORNIA’S BUDGET: AN EXPENSIVE NEEDLESS DELAY: Missing the deadline on a budget has cost California billions and undermined confidence in the state.

Editorial From the Los Angeles Times

July 17, 2009 -- Maybe you've seen the TV commercial. "Sacramento" is asking Gov. Arnold Schwarzenegger to sign a budget that "raises your taxes and spends money we do not have." Schwarzenegger is "standing firm." It's an act, and not a very good one.

The governor and legislative leaders are in what Californians can only hope are the final days of negotiations to close a $26-billion budget gap. Democrats went through their empty gesture a month ago, seeking to fill the hole with taxes on oil extraction and tobacco sales. But they knew those wouldn't fly -- and they didn't -- and there is currently no tax proposal being discussed in budget talks, regardless of Schwarzenegger's claims to the contrary.

What he's trying to do instead is to portray the three additional post-deadline weeks that the state budget has been out of balance as time well spent. That's debatable at best.

If those three weeks really helped the state crack down on supposed waste, fraud and abuse, we'll gladly take it, but we have several serious qualms. First, the savings from many of these reforms may, with luck, just offset the $1.5 billion to $3 billion the state lost by blowing its June 30 deadline, stopping cash payments to vendors and issuing IOUs with interest. So what was gained? The governor might answer that savings kick into future years as well, and that's great -- if there really are such savings to be had. County welfare officials have rejected Schwarzenegger's blithe assertion, for example,that many people in the state's welfare-to-work program aren't really looking for work and, without reforms, never will. CalWorks clients in Los Angeles County are lining up to grab the temporary and part-time jobs made available through the state program.

Are welfare programs chock-full of cheaters? We're left to rely on the word of the governor -- the same man who is raising special-interest money to run commercials pretending that he is in the midst of a fight over taxes.

Meanwhile, reforms in other areas, such as In-Home Supportive Services, were making their way through the Legislature. It is there, in public, where law and policy should be crafted, not in closed post-deadline budget sessions.

It would be merely annoying if the Kabuki, to use the governor's word for it, came during a typical budget disaster year. But this one isn't typical. This year, as its credibility erodes, California is nearing default, in which the state doesn't merely fail to pay its bills but shows no prospect of ever being able to do so. Then it would be too late for reform; no one would do business with California, and other states on the edge -- and finally all states -- could fall.

Schwarzenegger and the Legislature were on the verge of closing the budget gap and backing away from default at the end of June. Delay, ostensibly in the name of reform, deepened the problem and swept away much of the remaining confidence in California's ability to meet its obligations. It's hard to see that as worth the wait.

BUDGET MESS MAKES CALIFORNIA VULNERABLE TO CRIPPLING CREDIT DOWNGRADE, OFFICIAL WARNS: Treasurer Bill Lockyer says the state could find funding sources for crucial programs cut off if its credit rating is dropped to junk status. Lawmakers and the governor vow to keep negotiating.

By Evan Halper and Eric Bailey | From the Los Angeles Times

2:50 PM PDT, July 16, 2009 -- Reporting from Sacramento — State Treasurer Bill Lockyer warned today that state leaders' failure to reach a budget deal has put California at risk of a credit downgrade that would cut off access to funds needed for building schools, roads and other public works projects.

"With every passing day, the state's credit rating moves closer and closer to the junk pile," Lockyer said in a prepared statement. "If our credit rating sinks to junk status, the state will find the door to the infrastructure bond market locked shut."

The warning came as budget negotiations remained stuck amid simmering frustrations, although legislative leaders and Gov. Arnold Schwarzenegger vowed to forge ahead in hopes of settling on a package to close California's $26.3-billion deficit.

Speaking at a midday news conference, Schwarzenegger characterized the state of negotiations, which halted Wednesday night.

"It wasn't a breakdown," he said, "but I think a stall. . . because some new issues came up."

No time has been set to resume talks, though Assembly Speaker Karen Bass (D-Los Angeles) said more bargaining sessions would take place. And the Legislature has postponed its summer recess, scheduled to begin Friday, pending a budget agreement.

"The legislative leaders plan on working through the weekend, and we hope to get a deal soon," said Jim Evans, a spokesman for Senate leader Darrell Steinberg (D-Sacramento).

The prime obstacles to an accord are in the areas of education and welfare. One major sticking point is how to tweak voter-approved school-funding guarantees so the state can cut billions of dollars it needs to balance its books -- while still guaranteeing that school funding will be restored when the economy rebounds.

Aside from disagreements over education funding and welfare, Schwarzenegger spokesman Aaron McLear said, Democrats remained "unwilling" to make deeper cuts to create a healthy reserve so the state can weather an economy that could get worse before it gets better.

Democrats are pushing for the budget package to include changes in state law that would assure repayment of roughly $11 billion diverted from education when the economy improves and create new guarantees that schools would not lose money in future downturns. The governor said he would support repayment of the $11 billion but will not allow permanent changes to the funding formulas.

"I think we are not going to do that," Schwarzenegger told reporters, "because Proposition 98 can only be changed by the people."

Schwarzenegger says the changes he wants to state government operations would produce long-term savings by making various programs more efficient. Democrats have resisted, saying there is not enough evidence that they would be effective, and they have not been properly evaluated through normal legislative hearings.

One contentious proposal, some participants said privately, would change the state welfare program to increase penalties for recipients who do not meet minimum federal work requirements. Currently, emergency cash is available for children of parents in that category; those grants could be eliminated under Schwarzenegger's plan.

Thursday, July 16, 2009

THE SALLY RAND OF LEGISLATURES: “The Democrats want some guarantees and protections for education funding, and the governor’s evidently saying nix to that”.

By Patt Morrison - Patt Morrison Blog KPCC 89.3 FM

Thursday July 16th 08:26 AM -- Oh, that legislature is such a tease, with the peekaboo budget – it’s off, it’s on, we have a deal, no we don’t.

By ten pm, the deal that looked good eight hours earlier – as Assembly speaker Karen Bass told us – was stalled and everybody went home to think it over for the night.

Whatever budget we wind up with, it won’t be any oil painting. Schools? Cut. Health services for poor kids and homebound elderly? Cut. Prison budget? Cut. The sad part is that even though this budget may straggle across the finish line, bleeding from $26 billion in cuts, it’s no triumph; as is so often the case, some cuts will wind up costing more than they save. The elderly whose adult day care is cut will wind up in bogglingly more expensive nursing homes. Poor kids who don’t get health care coverage will still get sick – and end up in bogglingly more expensive emergency rooms. Penny-wise, billion-foolish, maybe. In exotic-dancer terms, services could be stripped. But you can still read someone's lips, because they're saying ''no new taxes.'' You could still hope for a ten-spot in the g-string, though.

And then there's burlesque-like tease. The state Board of Equalization goes and dangles the prospect of a billion plus dollar tax bonanza in front of the state. It’s calculated that taxing the marijuana trade could raise as much as $1.4 billion a year. It arrived at this figure in response to a proposal by a San Francisco assemblyman to handle dope the way we handle booze: regulate it and tax it.

But don't count your buds before you pick 'em, bud.

Yesterday we heard about two breakthroughs in Alzheimer’s disease: a Duke University finding that a certain genetic biomarker could flag a coming case of Alzheimer’s anywhere from five to seven years before symptoms actually show up – and a UC Irvine study found that a drug rather like one used to treat the inflammation from rheumatoid arthritis could likewise reduce brain-cell inflammation that exacerbates Alzheimer’s. Lab mice treated with the drug didn’t suffer the same memory loss that untreated mice showed.

And how did Goldman Sachs manage to make a humongous $3.44 billion profit in the second quarter of this financially wretched year? We spent time with two guests on that topic – and one of them concluded pretty much what I would hear a few hours later, when one member of my book group said that as soon as he heard those numbers, he figured something or someone got finagled.

Today – could California really stage another constitutional convention? And I mean, make some really serious changes? Like to the initiative process? Proposition 13? Hey, if the guys in powdered wigs and buckled shoes could do it, why can’t we? Okay, then – what power would YOU be willing to give up? And to whom?

See? Harder than it looks.


The state could have had a budget weeks ago and avoided the embarrassment of IOUs, but various actors -- especially the top one -- wouldn't let it happen. Now, everyone loses.

George Skelton



George Skelton | LA Times Capitol Journal

Darrell Steinberg, Karen Bass

Rich Pedroncelli / Associated Press -- Senate leader Darrell Steinberg and Assembly Speaker Karen Bass talk with reporters as they head to a budget meeting Wednesday. Bass recently accused the governor of “moving the goal posts.”

July 16, 2009 -- From Sacramento -- They whiffed a fat batting practice pitch. Blew a gimme putt. Inexplicably clanked a slam-dunk.

Pardon the sports jargon, but it's a civil way to characterize incompetence and failure in Sacramento. It avoids invective language already too prevalent in California's Capitol.

Three weeks ago, as I left town on vacation, the politicians seemed poised to close a $24-billion deficit hole, which would have saved the state from issuing costly IOUs and suffering national ridicule.

Whatever budget deal ultimately is passed -- and in this economy it'll only be a temporary fix, at best -- virtually the same agreement could have been reached weeks ago.

What happened? For one, Gov. Arnold Schwarzenegger swung for the fence -- not willing to settle for a run-scoring single -- and didn't seem to know where the fence was.

But there were errors all around.

Democrats wasted too much time fumbling with tax increases that they knew never were going to connect and that many voters had made clear they hated.

The loudest message from the California electorate while rejecting the governor and Legislature's budget propositions in May was that it wanted Sacramento politicians to fix the state's fiscal mess themselves and not dither. Just do it!

So much for that notion.

But accompanying that overarching message was a strong chorus of: "Stop taxing us. Live within your means."

Schwarzenegger and Republican legislators heard the "no tax" gospel, even if some public employee unions and liberal activists closed their ears.

Democratic legislative leaders understood the political reality: They had few options. Deeper slashes had to be made in healthcare and welfare programs. Education would take a big hit, although there'd be some help from federal stimulus money. More cuts would be needed in virtually every state program, from prisons to parks.

Moreover, voters had granted Democrats a license to whack away.

The electorate's verdict had plunged the state $6 billion deeper into debt, cut off $16 billion in future tax hikes and denied schools $9 billion in eventual restoration of previous cuts. Before casting their ballots, voters had been warned about the dire consequences of rejecting the props.

Additionally, the measures had been opposed by labor and social groups that despised the ballot package's key feature, a modest spending cap. So the Legislature's majority party owed these traditional allies practically nothing when they began yelping about the program cuts -- and trims to state employees' pay -- forced, in part, by the propositions' demise.

Politically, signing off on the inevitable budget butchering should have been a slam-dunk. A gimme putt. A soft pitch.

But philosophically, Democrats couldn't handle it. They did cut sharply, but also decided to play out the game fighting, by pushing tax increases on oil companies, smokers and motorists. That losing effort took up valuable time right before the July 1 deadline for avoiding IOUs.

Democrats produced a stop-gap plan supported by Assembly Republicans that would have staved off IOUs. They proposed $3.3 billion in cuts to education and other programs that would have kept the cash flowing, at least for a few weeks. It would give them time to negotiate more cuts. Schwarzenegger rejected the idea and persuaded Senate Republicans to follow.

That's where the governor began bobbling the ball, although his coaches figured he was playing to his fan base, what's left of it.

Issuing IOUs will cost the state roughly $26 million in interest for July, the state controller's office estimates. The IOUs also prompted Wall Street bond rating agencies to lower California's credit to near junk status. That potentially could cost the state $7.5 billion over 30 years, according to the treasurer's office.

Schwarzenegger, aides say, calculated that Democrats wouldn't negotiate seriously without facing a deadline, such as the latest: most banks refusing to accept IOUs. Negotiating piecemeal would get nowhere, the governor believed.

But he might have dodged IOUs completely. Guess it doesn't rankle much that the state he has governed for nearly six years must now pay bills with scrip.

Schwarzenegger rankled Democrats by producing a packet of "reform" demands just before the IOU deadline. Most made sense, but they entered the game late.

"Moving the goal posts," Assembly Speaker Karen Bass (D-Los Angeles) called it.

She also theorized that the governor was going down his "legacy list" -- striving for achievements he can point to after leaving office in 18 months. That's fine, Bass says, but more thought and deliberation are needed. "You shouldn't use the budget process to jam through public policy."

Senate leader Darrell Steinberg (D-Sacramento) says Schwarzenegger returned to "the Terminator zone" after the May election and resumed bashing legislators, making negotiations more difficult.

Typical rhetoric: "I don't want to kick that can down the alley anymore. I've given them enough chances and now I say, let's fix the problem. . . . It's easy for the politicians to keep promising things, but they can't deliver. They live way, way beyond their means."

You'd think this guy hadn't been the head coach and superstar for all these years.

Both sides should have called the game long ago. There'll be no winners -- just bigger losers the longer it lasts.

Wednesday, July 15, 2009


The Wall Street Journal

By STU WOO | The Wall Street Journal

JULY 16, 2009 - California leaders say they are near a compromise on fixing the state's $26 billion budget shortfall, signaling the end of a weeks-long impasse that has forced officials to issue IOUs to keep the state out of default.

Gov. Arnold Schwarzenegger and legislative leaders have held negotiations late into the night this week to work out the last details of a budget plan, which staffers said could be finalized as soon as Thursday morning. "We're close," said Matt David, a spokesman for the governor. "There are still some details to be worked out."

Mr. Schwarzenegger and legislative leaders have agreed on $14 billion to $15 billion in spending cuts, with about a third of that in education, said staffers for the two sides. The remaining $11 billion gap would be closed through one-time fixes and accounting gimmicks -- such as issuing state workers' paychecks in July 2010 instead of June 2010 to save money for the current fiscal year -- despite the Republican governor's repeated demands for a lasting overhaul of spending.

Several controversial plans are still on the negotiating table, Mr. David said. Among them are the governor's proposals to scale back welfare programs, eliminate a college-scholarship program, close all state parks and borrow $2 billion from local governments.

The nation's most-populous state faces a $26 billion deficit in its $92 billion general-fund budget through June 2010. In February, lawmakers closed most of a $42 billion gap for fiscal years 2009 and 2010 through steep spending cuts and new taxes.

Budget stalemates are familiar in Sacramento, which has seen only a handful of spending plans passed on time in the past 30 years. But with the state on the brink of insolvency this year, this impasse has been far more costly.

Lawmakers missed a June 30 deadline to pass spending cuts, preventing them from reaping $3 billion in savings during the fiscal year that ended that day. That also forced the state controller to begin issuing IOUs to keep the state from running out of cash by July's end. The controller's office said it had issued 130,501 IOUs, worth a total of $588.1 million, by the end of Tuesday. The state will have to pay interest on the IOUs, while investors will charge California more for its annual short-term borrowing.

Dan Walters: Out-of-staters gleefully delve into California's woes OUT-OF-STATERS GLEEFULLY DELVE INTO CALIFORNIA’S WOES

By Dan Walters | Sacramento Bee

Wed, Jul. 15, 2009 -- National Public Radio is running a series of broadcasts this week called "California in Crisis”. And NPR is not alone.

Network and cable television news shows, public broadcasters, major out-of-state newspapers and countless magazines are taking turns recounting and analyzing California's economic and fiscal travails. The tone of many reports is found in the German word "schadenfreude." It means taking pleasure from the distress of others.

The state's periodic social and economic upheavals have always generated that kind of media attention, something along the lines of "tarnish on the Golden State." But the current spate has an even edgier tone, suggesting that this time, it's worse and at least semi-permanent.

One example is California journalist and futurist Joel Kotkin, writing in Forbes magazine: "But the fundamental problem remains. California's economy – once wondrously diverse with aerospace, high-tech, agriculture and international trade – has run aground. Burdened by taxes and ever-growing regulation, the state is routinely rated by executives as having among the worst business climates in the nation. No surprise, then, that California's jobs engine has sputtered, and it may be heading toward 15 percent unemployment."

The Economist, a sober-sided British magazine, compares California to Texas, noting that the Lone Star State's economy has weathered the national recession nicely and suggesting it may have replaced California as the place creative and ambitious people flock to for opportunity.

The Economist cites "dysfunctional government" as a major California problem. It adds, "No state has quite so many overlapping systems of accountability or such a gerrymandered legislature," and describes the state's ballot measures as the "crack cocaine of democracy."

The New York Times surveys those who want to run for governor next year and wonders whether anyone can run an evidently dysfunctional state.

The carping tone and occasional inaccuracies aside, it's difficult to fault what the out-of-state media are saying about us. They see dysfunction because there is dysfunction. They wonder about our head-in-the-sand attitude about the state's economy, an assumption that everything will turn out all right, because that's exactly how we act.

Even as the state's economy continues to falter, state officials – including those in the Schwarzenegger administration – continue to add new layers of regulation, not to mention new fees and taxes, that contribute to the widespread belief that we are hostile to job-creating investment. And that doesn't include the psychological effects of chronic budget deficits, IOU payments to creditors and a credit rating much lower than that of any other state.

We desperately need to straighten out our laughingstock government, balance the state budget and demonstrate to the rest of the world that we're still in the game. The alternative is economic and social decay.

Friday, July 10, 2009


Former longtime legislator John Vasconcellos (D-Milpitas) analyzes the ingredients that went into making the state budget crisis so bad (Hint: Proposition 13 gets dragged in by its tax-restricting toes), and offers his personal recipe for climbing out of the hole.

There's plenty of blame to go around in the budget crisis. Fingers can be pointed at Gov. Arnold Schwarzenegger, Democrats, Republicans -- and you and me.

By John Vasconcellos | Opinion From the Los Angeles Times

July 10, 2009 -- I was recently hospitalized with a life-threatening illness that it took doctors several days to accurately diagnose. Until they fully understood the problem -- which turned out to be an antibiotic-resistant staph infection -- they couldn't prescribe the medication that would cure me.

The experience got me thinking about California.

Our state's protracted budget crisis sometimes seems unsolvable. But part of the problem may be that those who are trying to solve it don't fully understand its cause.

I represented the Silicon Valley for 38 years in the Legislature, and I chaired the Assembly Budget Committee for 15 of those years. As a result, I have some insights into our current crisis that may be useful.

The immediate problem, of course, is a $26-billion shortfall, which we must now plug if California is to pay its bills. But before we can fix things, we have to understand how we got to this point.

A good place to start is with the slew of revenue reductions that have hit the state since 1978, when Californians passed Proposition 13. The initiative dramatically reduced most property taxes and resulted in a 57% reduction in property tax revenue during its first year, and its effects continue.

Another revenue drop came in 1982, when voters passed an initiative abolishing the state inheritance tax. Before that, California had taken in nearly $1 billion a year in estate taxes.

And there are vehicle license fees. Starting in 1998, the fees were reduced incrementally until Gov. Gray Davis raised them to close a budget gap in 2003. When Arnold Schwarzenegger came into office later that year, he immediately reversed the hike -- at a cost to state coffers of about $4 billion each year since then.

Add to that the collapse of the bubble in 2004 -- which resulted in a drop of several billion dollars in state revenues from capital gains taxes -- and the current global economic downturn and you start to see how state revenues have suffered.

Next, consider a series of structural complications that hamper the Legislature's ability to come up with solutions. First among them -- again -- is Proposition 13, which requires a two-thirds vote of both legislative houses to raise taxes. This has meant that a small minority can keep the majority from enacting tax hikes that would help balance the budget.

Term limits, enacted by voters in 1990, were designed with good intentions. They would, their backers said, allow for more turnover in state government and more opportunity for worthy candidates who wouldn't have a chance against incumbents. But term limits have also meant that many legislators don't have deep experience in the state issues facing them. They also don't have enough time in office to develop collaborative relationships with their fellow legislators.

The 2002 reapportionment deal further exacerbated matters by creating "safe" districts for Democrats and Republicans, which have largely ensured that people at the liberal or conservative extremes of their party are seated.

So, if those are the basic problems, whom should we hold accountable? Each and all of the following bear responsibility.

* Schwarzenegger: Despite his good heart and mind, our governor seems to be lacking proficiency in basic mathematics. While he has said the budget can't be balanced by cuts alone, he hasn't proposed solutions that would close the gap. And many of the cuts he has proposed would cost the state more in the long run.

* The Democratic majority in the Legislature: There is no denying that Democratic lawmakers failed to create a sufficient rainy-day fund, preferring to spend money when times were flush -- often using one-time revenue sources to fund ongoing projects. They did this both to protect services for needy Californians and because they are overly responsive to public employee unions, especially those in public safety.

* The Republican minority in the Legislature: Unlike their predecessors, who joined Govs. Ronald Reagan and Pete Wilson in meeting Democrats halfway, the current crop of Republicans in Sacramento seems unwilling to compromise. All but one has signed the "no new tax" pledge of Washington crusader Grover Norquist, whose stated ambition is to shrink government to "a size where we can drown it in the bathtub." This may make for good rhetoric, but it produces little in the way of sound public policy.

* We, the people of California: Voters in our state have repeatedly passed initiatives lowering taxes and earmarking funds for pet programs, thereby inhibiting the ability of legislators to make rational decisions about state spending. Voters seem to want an unsustainable combination of increased services and lower taxes.

That, in a nutshell, is how we got into this mess. It is the job of our current Legislature and governor to lead us out of the disaster, but it's the responsibility of all of us to understand the issues they face and demand a sound, long-term solution.

California is an economic powerhouse -- the eighth-largest economy in the world. And it is home to a wonderfully diverse, talented and creative population. But we now have some tough decisions to make. In the end, we will get the kind of government services we are willing to pay for. And we all need to participate in the discussion of what kind of state we want to have.

John Vasconcellos is a former state senator and assemblyman. His longer analysis of the budget crisis can be found at

Monday, July 6, 2009


  • THE DOWNGRADE TO 'BBB' is based on the state's continued inability to achieve timely agreement on budgetary and cash flow solutions to its severe fiscal crisis
  • THE RATING WATCH NEGATIVE reflects the short-term risk that institutional gridlock could persist, further aggravating the state's already severe economic, revenue and liquidity challenges and weighing on the state's credit.
  • “The riskier a bond is, other things being equal, the lower its rating. The highest-rated nondefaulted bonds are rated AAA or Aaa, and the lowest are rated C, with defaulted bonds rated D; thus, junk bonds can be rated anywhere between Baa (BB) and D.” -from the concise encyclopedia of economics

From Fitch Ratings via Business Wire

July 06, 2009 03:49 PM Eastern Daylight Time  -- NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the state of California's (the state) long-term general obligation (GO) bond rating to 'BBB' from 'A-'. The bonds remain on Rating Watch Negative. The rating action affects the state's GOs and lease appropriation and related bonds as detailed at the end of this release.

The downgrade to 'BBB' is based on the state's continued inability to achieve timely agreement on budgetary and cash flow solutions to its severe fiscal crisis. Since no agreement was reached by the June 30, 2009 fiscal year (FY) end, the state's controller has now begun issuing registered warrants (IOUs) for certain non-priority payments to preserve cash, and the budget gap to be addressed has increased to $26.3 billion from $24.3 billion. The use of IOUs for non-priority payments would offset cash shortfalls into September 2009 as now currently projected.

The Rating Watch Negative reflects the short-term risk, in Fitch's view, that institutional gridlock could persist, further aggravating the state's already severe economic, revenue and liquidity challenges and weighing on the state's credit. Resolution of the Negative Watch will depend on actions taken to address the cash flow imbalance. The 'BBB' rating indicates that expectations of default risk remain low, although the rating is well below that of most other tax supported issuers. GO debt in California has a constitutional prior claim on revenues, although after education; appropriation debt has a lesser legal claim, but the controller prioritizes payment directly after GO debt service, ahead of other mandatory payments.

With issuance of IOUs for non-priority payments, margins for meeting constitutional and court-required contractual commitments are narrowing. After September 2009, absent any proposed budget and payment adjustments, cash deficits will expand dramatically. Cash flow solutions, including the ability to access short-term borrowing, are inextricably tied to reaching timely agreement on effective and credible budget solutions.

The state's budget revision released in May had forecast a $24.3 billion budgetary gap through June 30, 2010, the end of FY 2010, before proposed solutions; $3.1 billion of proposed solutions were in FY 2009, with the remainder in FY 2010. By failing to reach agreement prior to June 30, 2009, the end of FY 2009, a portion of the $3.1 billion in proposed FY 2009 budgetary solutions has been forfeited; notably, such solutions would have alleviated the cash flow stress forecast in the early months of FY 2010 by reducing or deferring scheduled statutory disbursements, primarily to education. Moreover, under the state's constitutional spending formula for education, foregone FY 2009 proposed solutions lead to higher required spending in FY 2010 and beyond, and pushed the FY 2010 baseline budget gap to $26.3 billion.

The inability of the state to reach agreement has prompted the controller to begin issuing IOUs for non-priority payments, primarily disbursements to vendors, for certain social services, and for tax refunds, in order to ensure payment of priority payments, including GO and lease debt service. The controller's office estimates that $3 billion in IOUs will be issued during July 2009; priority payments of $10.8 billion will be made for education, debt service, Medicaid, payroll, pensions and other mandatory contractual obligations. Projections will be revised to reflect June revenue performance and other changes but as currently estimated, cumulative cash deficits of $3.7 billion are projected through August, offset by $4.5 billion in non-priority payments that could be covered with IOUS, excluding tax refunds. However, by the end of October, the projected cash deficit expands to $16.1 billion, well beyond non-priority spending of only $10.6 billion, excluding tax refunds.

Today's further downgrade to 'BBB' on Rating Watch Negative affects GOs, GO veterans, economic recovery and Cal-Mortgage Loan Insurance Division bond ratings.

Moreover, the following appropriation bonds of the state are also downgraded to 'BBB-' on Rating Watch Negative:

--Public Works Board (except for those issued for the Regents of the University of California);

--East Bay State Building Authority;

--Los Angeles State Building Authority;

--Oakland State Building Authority;

--Riverside County Financing Authority;

--Sacramento City Financing Authority;

--San Bernardino Joint Powers Financing Authority;

--San Francisco State Building Authority;

--Golden State Tobacco Securitization Corporation (series 2005A);

--California Infrastructure and Economic Development Bank state school fund apportionment lease revenue bonds;

--California Judgment Trust;

--Shafter Joint Powers Financing Authority;

--Taft Public Finance Authority.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.


Fitch Ratings, New York
Douglas Offerman, +1-212-908-0889
Richard Raphael, +1-212-908-0506
Cindy Stoller, +1-212-908-0526 (Media Relations)



…in which the Chinese explain the California Budget Mess while simultaneously suppressing the ethnic Uyghur minority

by Wang Yan Editor, ChinaView [Xinhua News Agency]

     LOS ANGELES, July 5 (Xinhua) -- As California has to operate on IOUs after failing to solve the budget crisis, Californians are asking who is to blame on all those problems facing this Golden State, a leader in the U.S. economy.

    Governor Arnold Schwarzenegger, himself a Republican, blamed Democratic state legislators on failing to make necessary spending cuts.

    But Democrats attacked Republicans and Governor Schwarzenegger for their refusal to raise taxes as a way to get new revenues. They also criticized Republicans for cutting services to the poor and needy, such as social services, health care and welfare for the poor, senior and disabled.

    If the governor had the money, he would certainly not ask for any spending cuts. But the problem is, the state government can get no new revenue if raising tax is not an option.

    It seems that the governor, both Republicans and Democrats in the state legislature are to blame. But some analysts say that voters in California are to blame too.

    Schwarzenegger was elected governor in 2003 after former Governor Gray David (sic), a Democrat, was ousted in a recall campaign following a state budget crisis. Schwarzenegger promised voters he would fix the state's broken finances.

    Schwarzenegger knew why Davis was ousted because voters in California did not want more taxes. So he took the easy way out by cutting taxes by billions of dollars, backing off a tough spending limit, unilaterally adding spending to placate Democrats and blowing through a one-time surge in revenues.

    After he took office, Schwarzenegger sought and voters approved a 19 billion dollar bond issue that allowed the state to borrow heavily just to meet its annual operating expenses. Now the state has to pay the principal and interest of the bond.

    He also put a vehicle license fee cut of 6 billion dollars to make the voters happy. But soon in February this year he had to partly restore the revenue by temporarily raising the vehicle license rate from 0.65 percent of a vehicle's value to 1.15 percent.

    About 55 percent of California's general fund revenue comes form the personal income tax. The state depends heavily on the very rich to pay taxes. The top 5 percent of all income earners combine to pay 68 percent of income taxes.

    But the very rich are largely dependent on capital gains for incomes, which are most commonly realized through the sale of real estate and stocks. Tax revenues from capital gains have virtually disappeared following the crash of both the real estate and stock markets.

    Another reason is the failure of the governor and the legislature to cope with the dramatic drop of revenue after the bubble in Silicon Valley burst.

    During the late 1990s, revenues soared as California benefited more than any other states from the tech-stock boom that was centered in the Silicon Valley. But the state spent billions expanding and creating state programs and passing out billions more in permanent tax cuts.

    When such revenues dried, the state still refused to raise tax or cut spending as most of the U.S. states did during the 2002 recession. Instead, California relied heavily on borrowing and accounting maneuvers to balance its budget.

    Traditionally, Democrats are supported by unions and other civil rights organizations. Schwarzenegger accused Democratic lawmakers of ignoring "waste, fraud and abuses" and said that Democrats are "just beholden to the unions and the special interests."

    The governor also tried to shift the blame on the Democrats alone by saying that "the legislators' failure to act on those proposals sent a message to the California voters and to the taxpayers that says we want you to make the sacrifices but we in Sacramento don't want to make any sacrifices whatsoever."

    "Protecting the special interests who benefit from our dysfunctional system was more important to the Legislature than protecting the taxpayers and dealing with the entire 24 billion-dollar deficit," he added.

    Democrats are the majority in the California legislature. In normal conditions, it is easy for the Democratic controlled legislature to pass their version of budget. But California is one of the three U.S. states which require that the state budget should be passed with two thirds of majority, not simple majority. Republicans make use of the situation to kill any budget they disagree with.

    While saying the state legislature is to blame, some Californians also blame the voters. In 1978, Californian voters passed Proposition 13 to cap property taxes at 1 percent of assessed value and mandated that increases would require a two-thirds majority at both the state and local level. That proposition greatly limited the state's ability to get more revenues.

    That can explain why the Golden State has no money to support its welfare and social services.

    The California education system has deteriorated to the point where it is now ranked 47th in the United States. For the past 30 years, governors and legislators have tried to keep California's financial house together by a series of tricks, most often borrowing in anticipation of future revenues. That worked as long as the California economy was strong, but the recession drove California to the verge of bankruptcy.

    It seems that the California budget crisis is mixed with impacts of the recession, the struggle between legislators from different parties, structural problems of the state legislature, decisions from the voters and ability of the governor to lead.

Saturday, July 4, 2009


Gov. Arnold Schwarzenegger said Friday he is willing to reconsider his most recent proposal to help close the state's $26.3 billion budget shortfall by suspending state constitutional rules that control education spending in order to make deep cuts in school funding.  View Larger Image

Sat Jul 4, 2009 3:56pm EDT

By Jim Christie - Reuters

SAN FRANCISCO, July 4 (Reuters) - Governor Arnold Schwarzenegger, optimistic California can finish its budget negotiations in a few days, is willing to reconsider his proposed cuts to education in hopes of averting a cash crisis, the San Francisco Chronicle said on Saturday. (ARTICLE FOLLOWS)

A compromise between the Republican governor and Democratic lawmakers may help clear the way for an agreement on an overdue state budget and avert a cash crisis for the government of the most populous U.S. state. California already is issuing billions of dollars in "IOUs" and, without a deal, is on track to run out of cash this month.

The San Francisco Chronicle reported that Schwarzenegger, in a Friday meeting with its editorial board, said he would be willing to reconsider his proposal to help reduce California's $26.3 billion budget deficit with cuts to school spending that would require suspension of constitutional rules on education expenditures.

"We are not stuck ... about the suspension," Schwarzenegger said during the meeting. "We've got to analyze all this."

He said budget negotiations are moving fast. "I think if we continue this way we can get this done in the next few days," he said.

Backing off on education spending cuts would go a long way with Democrats who control the state legislature.

On Thursday Democrats said they would no longer hold out for increasing taxes to help raise revenues to fill the budget gap. That was a major concession to Schwarzenegger and Republican lawmakers, who had opposed tax hikes and pressed for balancing the state's books with deep spending cuts.

That helped Republicans gain confidence that a budget deal could be reached soon.

"I think there is at least a 50-50 chance that we'll find a solution that is acceptable to all parties within a week," Assembly Republican Leader Sam Blakeslee said.

Democrats see backing off on education spending cuts as an important concession by Schwarzenegger.

"While taxes may be off the table, education cuts also have to be off the table," Democratic state Senator Leland Yee told Reuters.


Lawmakers failed to agree on balancing the state's budget on Tuesday and the state government began its fiscal year on Wednesday without a spending plan in place.

In response, state finance officials began issuing "IOUs" in lieu of payments for tax refunds owed to taxpayers to preserve cash from higher prior payments, including payments to investors holding the state's debt. They warned that local agencies overseeing health programs and a variety of recipients of state financial aid, including the disabled and college students, could be in line for IOUs.

The state controller plans to issue more than $3 billion this month in registered warrants promising payments if Schwarzenegger and lawmakers fail to agree on a budget.

California is experiencing a severe revenue downturn as a result of the recession, rising unemployment and the lengthy housing downturn that will leave the state's government with an austere budget. It likely will force additional spending cuts throughout the fiscal year.

"The reality is that the revenues are not looking good," Yee said. "We just simply don't have the money to keep up the pace of services we're providing."

California finance officials hope a budget deal is reached soon so they can stop their IOU effort, which aims to reassure the municipal debt market that the state will honor its bond payments ahead of nearly all other obligations.

Finance officials also want to reassure the market in anticipation of having to sell short-term debt for cash-flow purposes once a budget deal is reached.

California's budget turmoil has made Wall Street nervous. Standard & Poor's warned in a statement on Wednesday that if California's budget is not settled soon, the state's A-credit rating, already the lowest of any of the 50 states, is at risk of falling.



Matthew Yi, sAN Francisco Chronicle Staff Writer

Saturday, July 4, 2009 -- Gov. Arnold Schwarzenegger said Friday he is willing to reconsider his most recent proposal to help close the state's $26.3 billion budget shortfall by suspending state constitutional rules that control education spending in order to make deep cuts in school funding. That concession may help him avoid a political battle with the influential California Teachers Association. Although the powerful union has been largely quiet during budget talks, it could sway lawmakers who are desperately needed to pass a budget. A source told The Chronicle on Friday that the union is preparing a statewide television advertising campaign to fight any attempt to ignore the education spending rules that voters passed in 1988 as Proposition 98.

On Wednesday, Schwarzenegger had proposed suspending Prop. 98, which among other things requires that school funding be based in part on what was spent the previous fiscal year. The requirement can make it difficult, if not nearly impossible, to make large cuts in education - an expense that makes up about half of the state's discretionary spending.

Such cuts became even more inevitable when the state's gaping deficit grew overnight by $2 billion because the Legislature failed to approve a budget fix by midnight Tuesday, the end of the 2008-09 fiscal year.

Still, the governor, who has proposed cutting this year's education spending by $3 billion, said he was willing to consider other solutions.

"We are not stuck ... about the suspension" of Prop. 98, he said in a meeting Friday with The Chronicle's editorial board. "We've got to analyze all this. ... We have to figure out how to deal with it."

Democratic lawmakers said they are encouraged by Schwarzenegger's willingness to reconsider the Prop. 98 issue. Yet Senate President Pro Tem Darrell Steinberg quickly pointed out that the issue would have never surfaced had the governor on Tuesday supported three budget bills that would have saved $3 billion.

"This problem was completely avoidable. The administration is stuck because of its own ... strategy," said Steinberg, D-Sacramento.

The governor has refused to support partial budget fixes. But the budget impasse has caused a cash crunch that on Thursday forced the state controller to begin issuing IOUs to some taxpayers, businesses and creditors.

That impasse would become even more complicated by an enraged California Teachers Association and other education groups.

"They had not declared war on this governor who had made billions of dollars in cuts to education in his budget proposals ... and to have additional rounds of cuts proposed by him on top of the huge reductions they've already made have gotten them very, very upset," said Kevin Gordon, an education lobbyist.

Gordon noted that the California Teachers Association, which led the effort to torpedo Schwarzenegger's ballot measures to reform government in 2005, had supported the governor's budget-related ballot measures that failed in the May 19 special election. That could spell trouble for the governor, who is one of the biggest proponents of next year's ballot measure that would create an open primary system.

Telephone calls to CTA representatives were not returned Friday.

Nevertheless, despite this new wrinkle in the budget negotiations, Schwarzenegger said talks with Democratic legislative leaders have been progressing and he's hopeful that a resolution is near.

The governor said there has been a greater sense of urgency since Tuesday. Since then, the bulk of the budget negotiations have centered on how much to cut spending in health and human services.

"There's more willingness to look at our proposals more seriously - to look at reforms more seriously ... and to look at cuts more seriously," said Schwarzenegger, who has backed away from outright elimination of popular state programs such as health care for poor children, a welfare-to-work program for single mothers, and in-home support services for the elderly and the disabled.

The governor said "there's movement" in budget negotiations. "I think if we continue this way we can get this done in the next few days."