California Governor Jerry Brown's revised budget with $6.6 billion more revenue may not avert a cash crisis looming in July that may force the most-populous U.S. state to pay bills with IOUs for the first time since 2009.
Brown yesterday proposed asking lawmakers to keep $9.1 billion of taxes and fees from expiring, then having a referendum to validate the extension in November or later, when a statewide ballot can be arranged.
The state won't be able to borrow cash from Wall Street in July or August with that validation vote pending unless Brown and lawmakers agree on spending cuts that would be activated if voters turn down the tax plan, Treasurer Bill Lockyer said.
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"My office will not be able to complete a cash-flow borrowing transaction unless the final adopted budget includes real, inescapable, quickly-implemented spending cuts that would be triggered if voters reject the taxes," Lockyer said yesterday.
Brown, a 73-year-old Democrat, took office in January on a pledge to fix the fiscal malfunctions that left California with the lowest credit rating of any state from Standard & Poor's. The governor yesterday revised his budget proposal for the fiscal year that begins July 1, saying the state's improving economy would drive tax revenue $6.6 billion higher than forecast through June 2012.
That narrowed California's projected deficit to $9.6 billion from about $15.4 billion. Budget cuts and other measures in March reduced the general-fund gap from as much as $26.6 billion. Brown said the additional revenue lessens the need for higher taxes he proposed in January. His new plan postpones seeking a 0.25 percentage-point increase in personal income-tax rates until next year.
Need for IOUs California, which accounted for almost 15 percent of U.S. gross domestic product in 2009, may run out of money by July if lawmakers and Brown can't agree on how to erase what's left of the deficit, according to Controller John Chiang.
The state may be forced to pay bills with IOUs for the second time in three years, potentially driving down the state's credit rating and pushing borrowing costs higher, Chiang has said. The state issued $2.6 billion in IOUs in 2009 while waiting for lawmakers to pass a spending plan.
The tax extensions will require approval by a two-thirds vote of the Legislature. Democrats are four votes short of that margin. Republicans, who blocked Brown's proposal to put the tax extension before voters in June, welcomed the governor's concession that he would consider a spending cap tied to inflation and population change.
'Right Direction' "The governor's budget clearly moves in the right direction," said Senator Bob Huff, co-chairman of the Senate Budget and Fiscal Review Committee. "He's now talking about some of the reforms that Republicans have been asking for and clearly there are more revenues that what was anticipated, which is good, so the last thing we want to do throw rain on the fire and put out this kindling recovery."
Brown wants lawmakers to agree to keep in place a 1 percentage-point boost in the retail-sales levy, to 8.25 percent, and a 0.5 percentage-point increase in auto registration fees to 1.15 percent of a vehicle's value.
The governor has also proposed extending a reduction of the annual child tax credit to $99 from $309. The temporary tax and fee increases were put in place in 2009 and are to expire by July 1. Brown's initial plan in January asked lawmakers to put the tax extensions directly before voters in June. Republicans have so far opposed prolonging the measures.
'Finances in Order' "This is not the time to delay or evade, but to put our finances in order," Brown said yesterday in a Sacramento press conference.
Brown's budget calls for limiting the amount of general- obligation borrowing by California during the next 12 months to $3.9 billion instead of $9 billion that was planned. California, the largest U.S. issuer of municipal bonds, sold $10.5 billion of long-term bonds in 2010.
The state will sell $1.53 billion of debt late this year and $2.37 billion early next year and $2 billion of lease- revenue bonds during that time, Lockyer said. To finance infrastructure projects during the next 12 months, the state will draw from $11 billion of bond proceeds now parked in department accounts.
California's Extra Yield The extra yield that buyers want for 10-year bonds from California issuers compared with top-rated municipal debt rose to 117 basis points yesterday, from a one-year low of 107 on April 15. A basis point is 0.01 percentage point.
"Budget proposals don't really impress the marketplace very much at this point," said Bud Byrnes, the chief executive officer of Encino, California-based RH Investment Corp., which trades about $100 million in bonds each month. "We'll take it seriously when and if something gets passed. In the meantime, traders tend to have a very short time horizon."
Brown's plan also seeks to pay down $29 billion of an estimated $35 billion in debt accrued "by borrowing from future generations" to close previous deficits, such as money the state owes schools, the governor said.
"They seem to be putting up front in this budget document the future payment obligations and highlighting the extent to which the state has borrowed," said Gabriel Petek, senior director of credit market services at Standard & Poor's in San Francisco. "The governor's approach seems to more structurally oriented and that could be favorable for the state's credit."
California's constitution requires lawmakers to approve a budget by June 15 and for the governor to sign it by July 1. A new law approved by voters in November allows the budget to be passed by a simple majority vote and strips lawmakers of their pay when a budget is late.
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