Hillary quits.

California Governor Arnold Schwarzenegger will call for across-the-board spending cuts and a constitutional amendment to overhaul state finances amid the biggest budget deficit of his tenure.

Schwarzenegger, a 60-year-old Republican, will make the proposals during his annual State of the State address today, according to excerpts of the speech released by his office. He has already said he intends to declare a fiscal emergency to deal with the gap that\'s expected to exceed $3 billion in the current fiscal year and swell to as much as $14 billion in the 12-month period beginning July 1.

``It used to be that Sacramento plugged deficits by grabbing money everywhere it could -- pension funds, local governments, bonds, gas taxes meant for transportation,\'\' Schwarzenegger said in the excerpts. ``But we tightened the noose by taking away those options. We now have no way out except to face our budget demons.\'\'

Schwarzenegger said the cuts are needed as revenue lags behind spending amid an economic slowdown caused by the worst housing market slump in 16 years. He has often complained that budgets are hamstrung by mandatory spending increases that hamper his ability to balance the state\'s books.

``The problem is that, while revenues are flat, automatic formulas are increasing spending by 7.3 percent,\'\' said Schwarzenegger, who came to office in 2003. ``Even a booming economy can\'t meet that kind of increase. So the system itself is the problem.\'\'

Gimmicks

Schwarzenegger, a former body building champion and Hollywood actor, was swept into office in part on voter angst over how his predecessor Gray Davis handled the state\'s perennial budget problems.

Schwarzenegger vowed to bring an end to spending plans that were balanced with accounting gimmicks and borrowing. Once in office, he won approval to borrow $15 billion to plug a deficit in 2004. He has since diverted money to the general fund originally intended for schools and local transportation agencies.

``Never have I seen more brazen gimmicks employed than under this administration,\'\' said Senator Tom McClintock, a Republican from Southern California. ``My experience with this governor is that there is absolutely no relationship between what the governor says and what the governor does.\'\'

Budget Process Change

Schwarzenegger has tried twice since taking office to revamp the state\'s budget process. Lawmakers in 2004 opposed his plan to cap spending. Voters the next year rejected a constitutional amendment to restrict state spending to the prior year\'s level plus three previous years\' average revenue growth.

California traces its current fiscal dilemma to falling home sales and prices, which have crimped sales tax receipts as consumers buy less. Lower property tax collections have also weighed on the state, forcing it to send more money to schools to offset diminished local-government collections.

At the same time, wildfires in Southern California increased expenses, and the state was forced to set aside more money for teacher pensions. Legal battles have also left California without anticipated revenue from Indian tribe casinos.

Democrats, who control the Legislature, say Schwarzenegger and Republicans must consider higher taxes rather than pare vital social services to close the budget gap.

``We\'re not going to cut our way out of this,\'\' said Senate President Pro Tem Don Perata, a Democrat from Oakland.

Battle Lines

Republicans vow to block any proposal raising taxes to cover the deficit, said Assembly Republican leader Mike Villines. Republicans, while a minority in both chambers, can thwart passage because Democrats are eight votes shy of the needed two-thirds supermajority needed to raise taxes. Republicans last year held up passage of the budget for two months over proposed spending.

``We will not raise taxes this year to help liberal spending programs,\'\' Villines told reporters in the Capitol.

California, the biggest borrower in the municipal bond market, is rated A+ by Fitch Ratings and Standard & Poor\'s, their fifth-highest rankings, and a comparable A1 by Moody\'s Investors Service. Only Louisiana has lower credit ratings among U.S. states.

S&P on Nov. 20 lowered its outlook on $48.2 billion of California debt to stable, signaling that the state is unlikely to win a higher rating.

Typical Bond Trade

Yesterday, a 10-year California bond traded between securities dealers for 100.74 cents on the dollar to yield 3.9 percent. That is 0.33 percentage point, or 33 basis points, more than top-rated debt. In March, that same bond traded for 4 percent, 21 basis points more than top-ranked debt.

California\'s budget woes aren\'t unique. Thirteen states face shortfalls totaling $30 billion next fiscal year, the Center on Budget and Policy Priorities, a Washington research group, said in a Dec. 18 report.

To contact the reporter on this story: Michael B. Marois in Sacramento at [e-mail]

Last Updated: January 8, 2008 16:24 EST

Email this article Printer friendly format


Advertisement: What moves currency rates?