Calif. budget plan cuts spending, hikes fees

Reuters ^ | January 9, 2004 | Michael Kahn and Jim Christie

[calcowgirl]

UPDATE 5 -(Adds treasurer reaction paragraphs 9-10)

SACRAMENTO, Calif., Jan 9 (Reuters) - Gov. Arnold Schwarzenegger unveiled a state budget on Friday that he said would rescue California from its fiscal crisis by slashing $4.6 billion in spending while avoiding unpopular tax hikes.

Even so, Schwarzenegger, a Republican who won office on a wave of voter discontent with politics as usual, warned that the most populous U.S. state could still face bankruptcy unless voters approve a $15-billion bond issue in March.

“If we do not control spending today, we will put every program at risk, and California will be bankrupt,” Schwarzenegger said in unveiling his budget. “And a bankrupt California will not be able to provide services to anyone.”

The Democratic-controlled legislature will now consider Schwarzenegger’s $99.1 billion budget, which would cut billions of dollars from public health and welfare programs and hike college fees by up to 40 percent.

California faces a budget shortfall of as much as $18 billion and one top official warned that the state could run out of cash in 150 days.

“For the last five years, the politicians have made a mess of the California budget. Now it is time to clean it up,” Schwarzenegger said in a televised news conference.

Democratic leaders in the State Legislature, which must approve the budget by a two-thirds majority, said they were willing to work with Schwarzenegger but wanted to make sure spending cuts were made fairly.

“We are serious when we say we are looking for common ground,” incoming Assembly Speaker Fabian Nunez told a news conference.

However, California Treasurer Phil Angelides -- a Democrat who plans to run for governor and who has emerged as Schwarzenegger’s sharpest critic -- said the proposal would hurt California’s financial standing because it includes so many one-time fixes.

“This is a budget that is morally and economically bankrupt,” Angelides said. “I can’t sugarcoat this.”

BIG BOND, BIG QUESTION

The budget hinges on a still-open question of whether state voters will approve a $15 billion bond in March, but Schwarzenegger aides and Democratic officials disagreed over the alternatives if that measure fails.

State Controller Steve Westly, who cautioned that California was 150 days from running out of cash, said the state would have to turn to Wall Street for between $7 billion and $9 billion if voters reject the $15 billion bond.

Schwarzenegger’s finance director Donna Arduin, however, said the state would face a devastating $12.3 billion in additional spending cuts if the bond were to fail.

The proposed budget includes the assumption that a recovering economy will boost tax revenues by 4 percent, or some $2.9 billion.

In addition, it would cut $1.7 billion from general expenditures, $999 million from spending on transportation and housing and $880 million from health care. It also cuts some $728 million from higher education.

Further, the plan relies on about $5 billion in shifts between budget accounts, borrowing and other maneuvers to balance the state’s books -- tactics that Schwarzenegger had criticized his predecessor Gray Davis for using.

Schwarzenegger’s plan also counts on about $929 million from the issuance of state pension obligation bonds, which are also facing a legal challenge.

Financial analysts gave the budget mixed reviews.

“I was hoping for more real cuts as opposed to shifts,” said Kim Rueben, a public finance economist at the Public Policy Institute of California “It helps us for the year but I’m not sure how much it moves us toward having a sustainable spending and revenue mix.”

“In my mind, (Schwarzenegger) is moving in the right direction,” said Chuck Emrich, manager of municipal credit and strategies at Legg Mason Wood Walker in Baltimore. “The concept of doing some cutting is good.”

California, which has about $30 billion of outstanding debt, also has the nation’s lowest bond rating.

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[goldstategop]

$12 billion in spending cuts are hardly "devastating." Sorry to disillusion Donna Arduin, but that would simply roll back the state budget to the 1998 level. That's still larger than it was in 1990. I think voters tend to hear cry wolf when politicians warn of "doom."