Bloomberg News

California Republicans Block Brown’s Plan to Close Deficit

June 10, 2011

(Updates with governor’s promise in second paragraph.)

June 10 (Bloomberg) -- California’s Senate Republicans blocked Governor Jerry Brown’s plan to erase a $10 billion deficit as closed-door talks remain snagged on his demand for higher taxes as a deadline to pass a budget looms.

Republicans oppose the governor’s proposal because it would extend tax and fee increases set to end June 30. The so-called bridge tax would preserve the revenue measures pending the outcome of a voter referendum, planned for September or later, to keep them for five years. Republicans said the extensions would harm California’s economy. Brown said he doesn’t want to raise taxes without voter support.

“The Democrats have moved the goal post,” Senator Bob Huff, the Budget Committee’s Republican vice chairman, said in a telephone interview. “Now they are saying they need the taxes and then they will let the voters decide. But if the voters say ‘no,’ they still get stuck with another nine months of taxes.”

While the defeat didn’t surprise party leaders, California faces a cash shortage next month if a workable budget isn’t passed by the July 1 start of fiscal 2012. The key to getting a spending plan through the Legislature, where Democrats lack the two-thirds majority needed to raise taxes, may hinge on finding a compromise agreement that enough Republicans will support.

“There are no Republican votes for the taxes,” Huff said. The lawmaker from suburban Diamond Bar near Los Angeles said that Brown’s bridge tax wouldn’t pass muster with voters.

Narrower Deficit

Brown, 73, took office in January on a pledge to fix the fiscal malfunctions that have left California with an A- credit rating from Standard & Poor’s, its lowest for any state. He began the year facing a $26 billion deficit through June 2012. Since then, spending cuts passed in March and better-than- projected revenue have narrowed the gap to $10 billion.

Also weighing on negotiations is a U.S. Supreme Court ruling last month requiring the state to ease prison overcrowding. Brown says his plan is the best way to avoid putting thousands of inmates on the street.

Democrats are four votes short of the two-thirds margin needed under California law to raise taxes, lacking two votes in the Senate and two in the Assembly.

While Democrats were able to pass 10 of the 16 bills that are part of the budget package, the linchpin of the plan, the tax extension, was defeated in a 22-15 vote. They left that measure open for reconsideration. That means they could vote again on the bill, possibly as soon as tomorrow.

Difficult Choices

“If there was a pain-free choice to balance the budget, we would have made it months ago,” Senate President Pro Tem Darrell Steinberg, a Sacramento Democrat, said today.

In response to the defeat, Senate Democrats took up and passed a bill that would let local governments ask voters to increase taxes on goods and services currently taxed only by the state. Those items include income, retail sales, vehicle registrations, cigarettes and alcohol.

“If this bill is implemented, you better buy some U-Haul stock because businesses are going to be packing up and leaving this state en masse,” said Republican Senator Tony Strickland of Moorpark.

Controller John Chiang, a Democrat, has repeatedly warned Brown and lawmakers that California may run out of money if there’s no budget in place by July 1, forcing the state to issue IOUs, as it did in 2009. That’s because the state likely won’t be able to go to Wall Street for short-term cash borrowing until it has a spending plan that accounts for how it will be repaid.

Turning to IOUs

“Without some link of the tax extension to an election, we have deep concerns about our ability to go out to the private market” to cover short-term needs, said Michael Cohen, Brown’s deputy budget director. “Without that ability, then you end up back in the situation with payment deferrals and IOUs.”

The governor’s plan relies on retaining a 1 percentage- point boost in the retail-sales levy, to 8.25 percent, and a 0.5 percentage-point increase in vehicle registration fees to 1.15 percent of value. It also seeks to extend a reduction of the annual child tax credit to $99 from $309. All were put in place temporarily in 2009 and are set to expire by July 1.

Republicans, who initially opposed a statewide referendum on the taxes, have indicated they would be willing to allow a vote after polls showed voters would reject the extensions. The Legislature’s minority party wants lawmakers to pass a balanced budget now, without prolonging the revenue measures, and give voters the chance to reinstate the tax increases later.

Weak Voter Support

“There’s no polling that shows this is going to pass,” Huff said. “That’s why they want this bridge tax for a year.”

“That’s not a bridge, that’s a budget year,” he said.

A poll released June 2 said more than two-thirds of voters surveyed want a chance to cast a ballot on Brown’s plan, though most would reject the tax extensions. The Public Policy Institute of California said only 46 percent supported prolonging the levies and fees. The poll had a margin of error of plus or minus 4.3 percentage points.

In November, voters narrowed the legislative margin needed to pass a budget to a simple majority from two-thirds. The same measure also strips lawmakers of salary and per-diem pay for every day they’re late with the spending plan.

Under the new rules, if a deal isn’t reached, a simple majority of lawmakers may approve a budget that doesn’t raise taxes even if it cuts spending and provides for accounting maneuvers and internal borrowing.

No ‘Gimmicks’

Brown has said he doesn’t want lawmakers to send him a plan that relies on such “gimmicks,” as he calls them. If such a budget is sent to him and he rejects it, lawmakers would still get paid because the new law just requires them to send a budget to the governor.

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

Party leaders are negotiating a 10-year cap on annual state spending, using any surplus revenue to repay about $25 billion of debt, Huff said. That includes money siphoned from school districts, local governments and bonds sold to cover previous deficits.

Republican lawmakers have sought a ballot measure that would dismantle the existing state pension system that guarantees benefit levels regardless of investment returns. They have proposed replacing it with a hybrid that includes elements of a traditional defined-benefit plan and a 401(k) savings account, where recipients bear more of the investment risk.

Democrats instead want to offer the hybrid plan as an option for state and local municipal employees, with some incentives to encourage workers to move away from defined- benefit pensions.

--Editors: Pete Young, Walid El-Gabry

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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