By Michael B. Marois and William Selway
Dec. 24 (Bloomberg) -- CaliforniaGovernor Arnold Schwarzenegger wants President Barack Obama to help ease large- scale cuts to the most populous U.S. state’s already diminished social programs amid a $21 billion anticipated deficit.
Schwarzenegger, a Republican, plans to ask for relief totaling as much as $8 billion, according to a California official who asked not to be identified because details haven’t been resolved. Instead of seeking one-time stimulus money or a bailout, the state wants the U.S. to reduce mandates and waive rules stipulating minimum expenditures on programs such as indigent health care, the official said.
California has been among the states most affected by the economic recession. It has the lowest credit rating and recorded the nation’s second-highest rate of home foreclosures, trailing only Nevada. Unemployment peaked at 12.5 percent in October amid the loss of 687,700 jobs from the year before, when the jobless figure was 8 percent. Wealth declined as the stock marketlost 40 percent of its value in 2008.
“The problem is that there are no easy solutions left,” said Jean Ross, executive director of the California Budget Project, a Sacramento-based think tank concentrating on issues facing the poor. “Where do you go to cut that doesn’t permanently compromise the level of public services that this state needs to remain economically competitive and to have some semblances of a safety net left for vulnerable populations.”
Taxes and Cuts
Schwarzenegger and lawmakers worked to close a record $60 billion gap from February through July with $32 billion in spending cuts, $12.5 billion of temporary tax increases, $8 billion of federal stimulus money and more than $6 billion of other one-time fixes.
California’s deficits show how local governments are being forced to chose between raising taxes or cutting more funding for schools, health care and other programs, even as the economy is emerging from the recession that began in December 2007. The nascent recovery has yet to produce any job gains, a drag on states that rely on income and retail sales taxes.
Nationally, 35 states and Puerto Rico expect to have $56 billion less next year than they will need to pay for all of their programs, according to the National Conference of State Legislatures. In Nevada, Arizona and New Jersey, the difference amounts to more than one-quarter of their budgets, the conference said. Funds from the $787 billion federal economic stimulus bill enacted in February run out at the end of next year.
Last Chance
Schwarzenegger, 62, will detail his request for help when he delivers his annual State of the State address on Jan. 6 and unveils his budget on Jan. 8, his last chance to reshape California’s fiscal policies before he leaves office in January 2011 after seven years.
This time, Schwarzenegger’s arsenal of one-time accounting maneuvers he and lawmakers have previously used to temporarily paper over parts of the gap -- such as accelerating income-tax collections -- has been mostly depleted, making efforts to erase the latest $21 billion deficit more difficult.
The state also has struggled to implement cost-cutting measures that were part of the $85 billion spending plan approved in July. Courts blocked part of the budget that cut funding for home care for the disabled and another part that borrowed $800 million from an account that sets aside money for local transportation agencies.
‘Low-Hanging Fruit’
An accounting error means the state has to spend almost $1 billion more on schools than budgeted. Officials also underestimated the cost of health care for the poor by $900 million, and lawmakers failed to pass legislation to realize $1 billion less in anticipated prison spending.
Combined, the state faces a $6.3 billion gap in the current year and another $14.4 billion in the next.
“We’ve already gone after the low-hanging fruit and the medium-hanging fruit and the higher-hanging fruit, so it’s going to get tougher and tougher now to balance the budget,” Schwarzenegger told reporters in November.
The governor has said he won’t increase taxes again to close the gap. That means more cuts, complicated by mandated expenditures for programs such as Medicaid health-care for low- income residents. With reductions already made to programs for the poor, additional trims jeopardize those federal funds.
Biggest Issuer
“In terms of programmatic reductions, we have to keep an eye on the fact that in some areas -- be it education or health and human services -- if you run afoul of federal maintenance of efforts requirements, you risk the loss of federal dollars,” said Schwarzenegger’s budget spokesman H.D. Palmer. “As tough as 2009, these factors are going to make 2010 even more challenging.”
The state was the biggest bond issuer this year, selling $36 billion of debt. It may come to market with at least $5 billion more of public-works obligations in the fiscal year that begins July 1, state Treasurer Bill Lockyer said.
California’s general-obligation debt rating from Moody’s Investors Service is Baa1, the company’s eighth-highest investment grade, and A from Standard & Poor’s, the sixth- highest. By comparison, Greece, the poorest member of the 16- nation euro region, is rated two steps higher at A2 by Moody’s and two lower at BBB+ by S&P.
“California, which is more than three times bigger than Greece, is running out of money,” T.J. Marta, chief market strategist at Marta On The Markets LLC, a financial-research firm in Scotch Plains, New Jersey, told Bloomberg Radio today.
Higher Interest Rates
A Standard & Poor’s/Investortools index of California state and local debt has returned 13.1 percent this year through Dec. 22, about 1.5 percentage points less than the national average.
Investors have demanded higher interest rates from California, compared with other borrowers. The state’s 10-year bonds yielded 4.6 percent by the end of last week, 1.51 percentage points more than top-rated municipal borrowers, according to Bloomberg indexes. Three months ago, that difference was as little as 1.06 percentage points. Greek 10- year bonds yield 5.72 percent, Ireland’s 4.78 percent and Spain’s 3.93 percent.
“It’s never a quick budget, it’s always prolonged and when it’s prolonged the headlines get worse and spreads widen,” said Peter Hayes, who oversees $115 billion in municipal bonds for New York-based BlackRock Inc., the world’s largest asset manager.
Opposition to Cuts
Democrats, who control both chambers of the Legislature, are expected to oppose wholesale cuts to health and welfare programs. Such resistance, along with Republican opposition to tax increases, will be exacerbated as election-year politics heightens the partisan divide. Half of the state’s 120 Assembly and Senate seats go before voters in November.
Budgets and tax increases in California must be approved by a two-thirds majority, and Democrats are two votes short in the Senate and six in the Assembly.
“When you are looking at a deficit in the size we have, everything needs to be on the table,” Assembly Speaker Elect John Perez, a Democrat from Los Angeles, told reporters on Dec. 11. “The reality is that the likelihood of passing taxes in this environment is slim, but everything has to be on the table. We have to come up with a resolution to this budget crisis that asks everyone to sacrifice, not just the people that in the greatest need.”
To contact the reporters on this story: Michael B. Marois in Sacramento atmmarois@bloomberg.net; William Selway in San Francisco atwselway@bloomberg.net
Last Updated: December 24, 2009 07:51 EST
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