Published Online: June 26, 2009

Calif. Senate Rejects Cash-Saving Proposal

California's financial picture darkened Thursday after Senate Republicans blocked a legislative attempt to avoid having the state issue IOUs through a complicated cash-saving maneuver.

The move would have temporarily cut and delayed billions in education funding, raising concerns among officials that it could further strain K-12 and university finances.

The Legislature scheduled a third day of meetings Friday, but Democratic and Republican lawmakers remained at odds over how to solve the state's $24.3 billion shortfall, less than a week before the beginning of the new fiscal year.

Democrats have been reluctant to close the shortfall with cuts alone, while Republicans refuse to raise taxes.

At the same time, a main bond-rating agency downgraded the state's credit worthiness, citing in part concerns about the state's ability to reach an agreement before the state runs out of cash. The downgrade will make borrowing more expensive.

As hopes for a quick budget resolution receded, legislative gridlock increased the chances that the state controller would have to issue IOUs to thousands of state contractors starting July 2. Those contractors provide an array of services, from in-home care for the frail to community health clinics.

The state Assembly on Thursday hoped to avoid the IOU threat by passing a package of bills intended to preserve cash until lawmakers can reach a budget deal. Later in the day, Senate Republicans blocked those bills from going to the governor's desk.

"I don't care what they did in the other house," said Sen. Bob Dutton, R-Rancho Cucamonga, on the floor. "If it's not right, it's not right."

Schwarzenegger has said he wants to solve the full deficit at once without gimmicks that push the problem into the future. He threatened to veto the package of bills that passed the Assembly if it was sent to his desk, calling it a piecemeal approach.

On Thursday, Democratic lawmakers pleaded for GOP support for their stopgap plan, which would have bought the state time until a full budget compromise could be reached.

"My constituents want to see their schools function, they want to see parks, they want their neighbors to have health care, they want roads," said Sen. Denise Ducheny, D-San Diego, getting teary-eyed as she addressed her colleagues. "I don't understand why you would not want to do that if you can."

The Assembly passed three bills on a bipartisan vote by early afternoon, but the Senate fell short of the necessary two-thirds vote.

The thrust of the bills was to cut and delay about $5 billion in payments. K-12 school districts, the University of California, the California State University and community colleges would see their regular payments for the coming fiscal year delayed by several months, as would local governments.

The bills would have deferred payments to the public education systems, as well as funds used by cities and counties to repair local streets. Lawmakers also proposed changes to the way redevelopment agency funds are distributed by the state.

Those moves would have helped address a portion of the state's overall deficit by reducing minimum education spending for the coming year. Their main goal was to preserve cash so the state would not immediately have to start issuing IOUs, a consequence of revenue falling far short of spending obligations as the new fiscal year begins.

State Controller John Chiang and state Treasurer Bill Lockyer issued a joint statement urging lawmakers to adopt the measures, saying they would solve California's "most urgent problem."

The K-12 and higher education departments that would be affected were uncertain how delayed payments of billions of dollars would affect their operations as they gear up for the start of the school year.

The move simply pushes the state's financial problems onto public schools and colleges, forcing them to borrow money and assume additional costs, said Erik Skinner, vice chancellor for fiscal policy for the California Community College system.

"It's an unfortunate piece of this budget package," he said. "It's going to create additional strain on our community colleges."

As debate was playing out in the Legislature, Fitch Ratings downgraded the state's long-term general obligation bond to A-, from A. California already has the lowest bond rating in the nation, driving up borrowing costs.

Also Thursday, an interest group representing California cities threatened a lawsuit if lawmakers follow through on a plan to divert $1.7 billion of gas tax revenue, which is intended to improve local streets and roads.

In their budget proposal, Democrats are proposing $11 billion in spending cuts and $2 billion in higher taxes on oil drilling and tobacco. Their plan also relies on filling the hole with $5 billion in fees and accelerated revenue through earlier collection of personal and corporate income taxes, and $5 billion in other solutions.

One of those additional solutions has been criticized as a gimmick that would just push the problem into another fiscal year: The provision would defer state employee paychecks by one day — from June 30, 2010, to July 1, 2010 — so about $1.2 billion would be counted against the 2010-11 fiscal year instead of the one that starts next week.

Schwarzenegger's plan would cut spending by $16 billion, borrow $2 billion from local governments, take $6 billion from other government accounts, accelerate personal and corporate income tax collections, and cut state employee pay by another 5 percent.

Both plans would raise $1 billion by selling the State Compensation Insurance Fund, a quasi-governmental agency that is the state's largest writer of workers' compensation insurance.

Republicans have not offered their own plan.

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