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."

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