Bloomberg News

California Budget Pact Anticipates $4 Billion in New Revenue

June 28, 2011

June 28 (Bloomberg) -- California lawmakers are to begin voting today on a budget that relies on $4 billion in newly projected revenue, needs only Democratic votes to pass and would set up a 2012 referendum on tax increases.

Governor Jerry Brown said he’ll allow more than $9 billion in higher taxes and fees, the linchpin of his budget math since January, to expire June 30. He’ll balance the budget of the most-populous state with the revenue forecast and additional cuts to universities and the courts.

The spending plan for the year starting July 1 bypasses Republicans who stymied the governor’s plans for a statewide vote on extending the taxes. It also steers away from a Democratic blueprint that Brown vetoed for what he said were legally questionable accounting maneuvers.

“We’ve had some tough discussions, but I can tell you that the Democrats in both the Senate and the Assembly have now joined with the administration and myself and we have a very good plan going forward with the budget,” Brown said at a news conference in Sacramento yesterday.

Brown, a 73-year-old Democrat, took office on a pledge to fix the fiscal malfunctions that have left California with the lowest credit rating of any state from Standard & Poor’s. The Golden State, which accounts for 13 percent of the U.S. gross domestic product, began the year with a $26 billion deficit. Since then, spending cuts approved in March and better-than- projected tax revenue shrank the gap to $10 billion.

Brown’s new plan counts on revenue that his budget office said will be $5.2 billion above its May projection, of which $1.2 billion has already been collected. Spending cuts of $2.5 billion would be triggered if the money doesn’t materialize.

Prioritized Cuts

Those cuts would be prioritized so that the biggest, about $1.5 billion in reductions to schools, would happen only if the shortfall is $2 billion or more.

The agreement reduces the chances that California will resort to issuing IOUs to pay bills as it did in 2009, said Gabriel Petek, a Standard & Poor’s analyst. Controller John Chiang warned in May that the state could run out of money by July without a budget agreement in place.

“To the extent that it allows the state to continue its cash-flow borrowing, it would take some pressure off the rating,” Petek said by phone yesterday from his office in San Francisco. “It seems to be beneficial for the short-term borrowing, but it probably doesn’t make a lot of progress on the multi-year structural deficit.”

Brown said the revised budget doesn’t deal with the “wall of debt” that he said has built up over the years due to accounting maneuvers.

Sales-Tax Drops

With some taxes and fees expiring, California’s retail sales-tax rate will drop 1 percentage point to 7.25 percent, still the highest statewide levy in the country. Vehicle registrations will decline 0.5 percentage point to 0.65 percent of value.

The budget counts on an additional $200 million under legislation requiring sales-tax collections by online retailers including Amazon.com Inc. for purchases by state residents. Amazon, the world’s largest online retailer, has threatened to sever ties with more than 10,000 affiliates in California over the proposal.

Lawmakers Forfeit Pay

Lawmakers have been forced to forfeit pay for every day they fail to send a balanced budget to the governor past a June 15 deadline.

Assembly Speaker John Perez, a Los Angeles Democrat, said that while Republicans thwarted Brown’s plan to put the tax extensions on a statewide ballot this year, the notion remains alive.

“The conversation has been started, and we will keep that conversation going as we move to the ballot next year,” Perez said.

The referendum would be in November 2012 on the same ballot as the U.S. presidential race. Such timing may bring out Democrats sympathetic to higher taxes, said Mark Baldassare, president of the nonpartisan Public Policy Institute of California.

“It’s always a hard sell to ask voters to support tax increases,” Baldassare said by phone from San Francisco.

Senate Republican Leader Bob Dutton said the Democratic proposal “does absolutely nothing to change government as usual.”

“The Democrats have said no to all of the Republican reforms that Californians are demanding, including pension reform, a spending cap and job creation,” Dutton, of Rancho Cucamonga, said in a statement.

--Editors: Pete Young, Mike Millard

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; James Nash in Sacramento at jnash24@bloomberg.net

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


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