Local Government to Pay for State Debt

Tuesday, July 21, 2009

July 21 (Bloomberg)—California lawmakers reached an agreement with Governor Arnold Schwarzenegger over how to close a $26 billion budget deficit that pushed the most-populous U.S. state to the brink of insolvency.

The deal, reached by legislative leaders after two months of frequently acrimonious negotiations, would slash spending for schools, public works and welfare programs amid the longest recession since the 1930s. If approved by the full Senate and Assembly, the agreement will also siphon money from municipalities, force companies and individuals to pay income taxes sooner and make it more difficult to receive state aid.

“We came to a basic agreement, a budget agreement,” Schwarzenegger told reporters outside his office last evening. “This is a budget that has no tax increases and this is a budget that is cutting spending and it deals with the entire $26 billion deficit.”

The agreement promises to end a battle over the $100 billion budget that forced California to pay some bills with IOUs, pushed debt ratings on $72 billion of bonds closer to non- investment grade and threatened to further batter the state’s economy. It is the second time this year that the government redrew the budget amid job losses that pushed unemployment to 11.5 percent in May and declining incomes that lowered tax collections 15 percent from a year earlier.

Senate and Assembly leaders said they will seek to put the proposals to a vote by July 23. It would require passage of more than a dozen bills by a two-thirds margin. While Democrats control both chambers of the Legislature, they are six votes shy of such a supermajority.

Spending Cuts

The agreement calls for cutting spending by $15 billion, including $6 billion from schools, $3 billion from colleges and $1.2 billion from prisons. Schools will be repaid $11 billion once the state’s economy turns around. It also raises $4 billion by in part accelerating personal and corporate income tax withholdings and increasing income tax withholding schedules by 10 percent.

It also calls for the state to divert more than $2 billion of tax receipts meant for local governments, redevelopment agencies and transportation districts. That money would be repaid with interest. Local governments could sell bonds backed by the promise of repayments. The agreement also shifts $1.5 billion between accounts to save money and moves the last payday for state workers in the current fiscal year into the next.