Bloomberg News

California Lawmakers Pass $92 Billion Spending Measure

June 16, 2012

California’s Democratic-controlled Legislature passed a $92 billion budget on deadline, allowing lawmakers to be paid even though they put off votes on supporting measures needed to implement the plan.

The bill, passed without a single Republican vote, relies on a November ballot initiative that would boost income taxes on top earners to the highest in the nation and raise the state sales levy, which already exceeds all others. If voters reject the increases, the budget calls for $6 billion in reductions, mostly from schools.

“The financial picture looks better for California than it did a year ago or two years ago,” Eric Friedland of Schroder Investment Management North America, which oversees about $2 billion in muni debt, said after yesterday’s vote. “The fact that they were able to pass a budget on time or ahead of time this year is certainly a credit positive.”

Governor Jerry Brown and his fellow Democrats are still at odds over the level of cuts he proposed in welfare and other programs for the poor to help erase a $15.7 billion deficit. Those cuts were among the bills not taken up on deadline.

“We’re still not there yet,” said Gil Duran, a spokesman for the governor.

Brown hasn’t said whether he’ll sign or reject the measure. He vetoed the first version of last year’s budget, forcing lawmakers to make changes. The constitution gives Brown until July 1 to sign a spending plan.

‘Smoke and Mirrors’

The budget measure is a “smoke-and-mirrors, gimmick-filled fraud,” Republican Senator Tom Berryhill said. “It is a train wreck waiting to happen.”

Treasurer Bill Lockyer, a Democrat, called the budget “financeable.”

“My office would be able to go to the market and complete the borrowing needed to meet the state’s FY 2012-13 cash flow needs, currently estimated at $10 billion,” Lockyer said in response to Republicans who asked whether the budget was balanced.

Legislative leaders said passage of the main spending bill permitted lawmakers to continue being paid. After years of delays, voters in 2010 stripped legislators of their pay for every day they missed the June 15 budget deadline.

That measure also lowered the vote threshold to pass a spending plan to a simple majority from two-thirds. The change made it possible for Democrats, who hold majorities in both the Senate and the Assembly, to pass the plan without Republicans.

“They don’t want to get dinged for their paychecks and they realize they have to turn something in today,” said Jaime Regalado, emeritus professor of political science at California State University, Los Angeles. “Their reasoning is that it’s better to do something that they can then wash their hands of, at least temporarily.”

Lowest Rated

The world’s ninth-biggest economy is rated A- by Standard & Poor’s, six levels below AAA and the lowest of any state. The yield penalty on California issuers relative to top-rated bonds rose as much as 16 percent in the past month, the steepest jump since March, Bloomberg Fair Value data show. S&P raised its outlook to positive in February.

The relative smoothness of the budgeting process is likely to prevent yields on California bonds from widening much relative to U.S. Treasuries, said Alan Schankel, a managing director at Janney Montgomery Scott LLC in Philadelphia.

“The past year’s events have instilled some confidence,” Schankel said by telephone, referring to California’s finances. “Certainly the revenue overshoot was frustrating, but that happened in several states.”

Brown’s deficit ballooned almost 70 percent since January because he overestimated how much tax revenue the most indebted state would collect.

The governor’s budget counts on reducing state employee costs by 5 percent, mainly by cutting workers’ hours. While the savings are written into the plan, unions still must agree to the change.

Brown also wants to slice $1.2 billion from health care for the poor, $1.1 billion from welfare and in-home help for the elderly and disabled, and $500 million from courts.

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: Stephen Merelman at smerelman@bloomberg.net


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