Bloomberg News

Brown Vetoes California Budget Pledging Extended Taxes Push

June 17, 2011

(Updates with Standard & Poor’s comment in 14th paragraph.)

June 17 (Bloomberg) -- California Governor Jerry Brown, who failed to win Republican support of tax extensions in six months of negotiations, said he’d “move heaven and earth” in another attempt after vetoing a budget lacking the provision.

Brown, a Democrat who pledged to solve California’s fiscal malfunctions without gimmicks, didn’t say how he’d get the Republican backing needed to pass his plan. His budget veto was the first in state history.

“I’m going to do everything I can, I’ll move heaven and earth, to get those votes,” Brown told reporters yesterday in Los Angeles.

Without a budget, the biggest issuer of municipal debt in the U.S. is unable to borrow from Wall Street to pay bills when its fiscal year starts July 1. Brown said the spending plan written by fellow Democrats, only the second in 25 years to meet a constitutional deadline, used legally doubtful techniques to paper-over a $10 billion deficit.

Brown didn’t immediately veto all of the so-called trailer bills that accompanied the budget, including one that calls for sales-tax collections by online retailers including Amazon.com Inc. for purchases by state residents. He said he’s still reviewing the measures.

Brown wants lawmakers to bridge the deficit by extending tax and fee increases that are set to expire June 30, to avert deeper spending cuts to schools and public safety. The governor needs to persuade at least two Republicans in each legislative chamber to back his plan before it can pass.

One-Time Fixes

The Democrats’ plan relied on a variety of one-time fixes to fill the gap, such as delaying $3 billion in school aid for four months, pushing it into the next fiscal years, and optimistic revenue projections.

“The budget I have received is not a balanced solution,” Brown said in his veto message. “It continues big deficits for years to come and adds billions of dollars of new debt. It also contains legally questionable maneuvers, costly borrowing and unrealistic savings. Finally, it is not financeable and therefore will not allow us to meet our obligations.”

Brown began the year facing a $26 billion deficit through June 2012. Spending cuts passed in March and better-than- expected revenue narrowed the projected gap to $10 billion.

Democrats were able to pass their plan with a simple majority thanks to a November voter initiative that lowered the threshold from two-thirds. Lawmakers for the first time faced the loss of salary and per-diem pay for every day they failed to meet a June 15 deadline to send the plan to the governor.

Requirements for Pay

Controller John Chiang, who issues state paychecks, said yesterday he’s analyzing the Democrat’s budget to determine if it met requirements for them to be paid. The law’s language requires legislators to send the governor a balanced budget; it doesn’t say it must be enacted to clear that threshold.

“We clearly met the obligation to pass an on-time budget,” Assembly Speaker John Perez, a Los Angeles Democrat, told reporters in Sacramento.

California needs a budget in place in order to borrow what has been projected to be about $7 billion of revenue anticipation notes, short-term municipal debt known as RANs, that the state offers annually when cash is low. The debt is repaid from later tax collections.

“Although the governor’s veto risks a protracted budget negotiation process that we believe could stress the state’s cash position, it is not clear to us that the budget package he vetoed would have averted cash problems,” Standard & Poor’s said today in a report.

Vendor Pay

Without a budget by July 1, Chiang can’t pay lawmakers or the more than 1,000 legislative workers and gubernatorial appointees. They would get any money owed once the spending plan is signed.

Chiang also can’t pay vendors who sell goods and services to the state, or send subsidies to community colleges, health clinics, foster-care parents, nursing homes and daycare centers.

Republicans have jockeyed for concessions on spending levels, cuts to government pensions and business and environmental regulations in exchange for their support to put Brown’s tax extensions on a statewide ballot.

“Californians deserve a budget that stands the test of time, and that requires the real reforms that they are demanding -- meaningful pension reform, a spending limit and business- regulation relief for job creation,” said Senator Bob Dutton, the Republican minority leader from Rancho Cucamonga.

--Editors: Pete Young, Ted Bunker

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; Alison Vekshin in Los Angeles at avekshin@bloomberg.net

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


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