Calif. fiscal experts see late August as deadline

By JUDY LIN, The Associated Press
4:40 p.m. July 9, 2009

SACRAMENTO, Calif. — It was only weeks ago that lawmakers, finance officials and the governor were warning that California was headed over a financial cliff.

Without a balanced budget by June 30, they said the state was at risk of running out of money and its government would grind to a halt. Then the calendar changed, and nothing much changed: The sky didn't fall when the new fiscal year started July 1, even though California remained without a balanced budget.

The state's deficit has only grown since then, but the only thing that has come to a standstill are the negotiations over closing California's $26.3 billion deficit.

Issuing IOUs to thousands of state vendors is preserving billions of dollars and buying state lawmakers time to find a compromise. On Thursday, analysts and state fiscal experts said lawmakers actually can procrastinate for perhaps six more weeks, and even a bit longer.

The consensus view is that their timeframe for reaching a compromise on closing the shortfall runs until late August.

Without a plan to balance revenue with spending, California will fall into the red in September, even with billions of dollars in IOUs going out. That will raise the possibility that the state will be unable to make contributions to its pension funds and will be forced to extend its IOUs to employee paychecks.

"It's not a situation anybody's happy to contemplate," said Gabriel Petek, director of credit market services at Standard & Poor's.

California is a major player in the nation's municipal bond market and the health of its economy has a ripple effect across the country.

The state already has begun issuing IOUs to state contractors, college students and taxpayers owed refunds.

Some major banks, including Wells Fargo, Bank of America and Bank of the West, plan to stop cashing the state IOUs on Friday to pressure lawmakers to end the budget impasse.

"During this time, there's growing sentiment that elected officials really do need to do their jobs and pass a budget," said Beth Mills, spokeswoman for the California Bankers Association.

That appears to be a failed strategy. A remarkable lack of urgency has permeated the Capitol this week, with no formal negotiations under way and partisan sniping between Republicans and Democrats.

Negotiations aimed at closing the shortfall have been stalled since the Assembly leader, Speaker Karen Bass, a Los Angeles Democrat, walked away from the talks on Monday. Lawmakers say they are still working, although there is no sign of an emerging bipartisan plan.

Senate leader Darrell Steinberg said he would not speculate about whether talks would drag into late August or beyond. Last year, it took lawmakers until Sept. 16 to pass a budget.

"I have no intention of allowing this to get even close to that far," said Steinberg, D-Sacramento.

California's budget problems are largely a result of the recession, with personal income falling statewide for the first time since the Great
Depression. Revenue from personal income tax plunged 34 percent during the first five months of the year, throwing the state's budget process into a state of chaos.

Republicans complain that Democratic lawmakers don't want to cut deeply enough, while Democrats say their GOP counterparts are unwilling to consider other options to balance the budget.

While lawmakers haggle, California has been issuing IOUs to vendors, counties and taxpayers owed refunds, a total of roughly $3 billion for July.

The state will pay 3.75 percent interest of the notes and plans to redeem them by Oct. 2.

As of Wednesday, the state has issued more than 90,000 IOUs worth $354 million.

That move saves cash and allows the state to make payments to schools and bond holders, which receive priority under the state Constitution.
State Controller John Chiang is planning to issue more IOUs in August if no budget-balancing plan is reached by then but has warned that they are only a temporary fix to the state's cash-flow problem.

Even with the IOUs, his office said California will be $600 million in the red sometime in September, a deficit that will only widen the longer lawmakers fail to fix the deficit.

By then, the IOUs likely will have to be expanded to cover the government payroll, Medi-Cal payments and pension contributions. Pensioners will continue to receive their checks, but the state's contributions to the investment funds will be deferred.

Such a move could invite court challenges. Unions representing state employees successfully sued California in 1992, arguing the state could not hand out IOUs in lieu of paychecks under the Federal Labor Standards Act.

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