Bloomberg News

California Budget Dispute Heads for Showdown as Deadline Looms

June 09, 2011

June 9 (Bloomberg) -- Committees in California’s Democrat- controlled Legislature passed spending plans including $8.1 billion of higher taxes opposed by Republicans, setting up a budget showdown as a constitutional deadline approaches.

Budget panels in the Senate and Assembly approved Governor Jerry Brown’s proposal along party lines. The votes late yesterday sent the plans to the floor of each chamber for a decision. Brown, a Democrat, wants lawmakers to temporarily extend expiring taxes and fees pending a statewide vote.

California, the world’s eighth-largest economy, may run out of cash if there’s no budget by July 1, forcing it to issue IOUs as it did in 2009. Under the constitution, tax increases require approval by two-thirds of lawmakers. Democrats are four votes short of that. Republicans have vowed to block passage.

The action “was a complete facade,” said Jim Nielsen, the ranking Republican on the Assembly Budget Committee. “There is nothing in this budget ‘framework’ that is worthy of support.”

Brown, 73, took office in January on a pledge to fix the fiscal malfunctions that have left California with the lowest credit rating of any state from Standard & Poor’s. He began the year with a $26 billion deficit. Since then, spending cuts approved in March and better-than-projected revenue shrank the gap to $10 billion.

Brown’s plan relies on keeping 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. It also seeks to extend a reduction of the annual child tax credit to $99 from $309.

Temporary Taxes

All were put in place temporarily in 2009 and are to expire by July 1. Brown wants the Legislature to approve the tax extension now and ask voters later, possibly in September, to extend the levies for five years.

Republicans would let the taxes expire and ask voters later if they should be reinstated. Under that scenario, the $10 billion deficit would be erased with spending cuts. If voters decide to restore the taxes, the cuts would be reversed. Voters in May 2009 refused to extend the same tax and fee increases.

“This document assumes we will get at least four Republican votes,” said Assembly Budget Committee Chairman Bob Blumenfield, a Democrat from Van Nuys. “A vote for this package is a vote for economic stability. It’s also a hard vote, but a necessary vote.”

California’s constitution requires lawmakers to send a budget to the governor by June 15. The Legislature has met that deadline five times in the last 30 years.

Withholding Lawmakers’ Pay

There are differences this year. In November, voters lowered the threshold to pass a budget to a simple majority from two-thirds. The same measure also stripped lawmakers of salary and per-diem pay for every day they’re late with the spending plan.

Brown has been meeting behind closed doors since March with Republican lawmakers to craft a compromise. The governor’s tax extension, a so-called bridge tax, is the major sticking point, said his spokesman, Gil Duran.

“The governor’s focus has been on a temporary tax extension to bridge the time gap between a vote on the budget and a vote of the people,” Duran said in an e-mail.

A poll released June 2 found that more than two-thirds of Californians want a chance to vote on Brown’s plan, though most would reject the taxes. The Public Policy Institute of California said only 46 percent of likely voters support the specific taxes and fees. The poll had a margin of error of plus or minus 3.6 percentage points for all adults and 4.3 percentage points for likely voters.

“There are Republican votes to put this up for a vote,” said Bob Huff, a Republican from Walnut who is vice chairman of the Senate budget committee. “There are no votes for a bridge tax. We would call that a bridge too far.”

Concessions for Republicans

Republicans have jockeyed for concessions on spending levels, pensions and business and environmental regulations.

They want a permanent spending cap that would limit future budgets, through a formula tied to inflation and population growth, with excess revenue in growth years used for a so-called rainy day fund and to pay down debt.

Republicans also want to dismantle the state’s public pension system, which guarantees benefit levels regardless of investment returns. They would replace it with a hybrid that includes elements of a traditional plan and a 401(k) account, where beneficiaries bear more of the investment risk.

The Republicans also want to reduce environmental regulations they say hamper business growth.

If California lawmakers can’t agree on eliminating what’s left of the deficit, Controller John Chiang has said 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.

The state issued $2.6 billion in IOUs in 2009 while waiting for lawmakers to pass a spending plan.

--Editors: Pete Young, Paul Tighe

To contact the reporter on this story: Michael Marois in Sacramento at mmarois@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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