Sun, Jul 26, 2009 - Page 7 News List

California closes budget deficit

REUTERS , SACRAMENTO, CALIFORNIA

California’s legislature on Friday approved a US$24 billion package of bills to close a deficit that had driven the state to the edge of financial ruin, although California Governor Arnold Schwarzenegger said the weak economy could create new budget holes.

Forced to pay with IOUs as coffers ran nearly dry, battling record 11.6 percent unemployment and a lingering housing crisis, the Golden State is still struggling, but the agreement will let it return to debt markets.

Exhausted legislators in the state Assembly passed their package late on Friday after working through the night. Assembly members dropped a scheme to allow oil drilling and other measures in the Senate plan, but Schwarzenegger said he could make up the difference with line-item cuts.

The state had calculated the budget deficit at US$26 billion, including a US$2 billion reserve sought by Schwarzenegger.

The governor congratulated legislators but was hardly jubilant, conceding that additional cuts may be necessary because of the weak economy.

“We’re still in troubled waters,” he told reporters after the votes.

Standard & Poor’s, one of the three credit agencies that has lowered California’s rating near “junk” levels, will look to see how many one-time measures were included in the final bills passed.

“It’s definitely a necessary step but it’s not clear if it’s a sufficient one to improve our credit concerns over the state,” S&P’s analyst Gabriel Petek said.

California’s budget also faces threats from opponents of the bills before the legislature. Unions for state workers have said they would challenge the bills in court because they contain more than US$15 billion in spending cuts.

Under the legislation, public schools would lose nearly US$6 billion, higher education about US$3 billion and prisons more than US$1 billion. Social services would lose more than US$1 billion and health programs would lose US$2 billion.

In addition, furloughs will continue for state workers for three days a month, cutting their pay by 15 percent.

The legislation also provides for redirecting billions of dollars from local governments, an idea opposed by many lawmakers. City and county officials say they will challenge it in court.

The League of California Cities said after the votes that the budget contains a “clearly unconstitutional diversion” of local redevelopment funds.

Schwarzenegger has been wrangling with legislators for months.

“This budget is an acceptable budget to me,” he said on Friday, adding that he would build a “responsible reserve” through line-item budget cuts.

The assembly package did not include a more than US$900 million reserve, US$100 million in offshore-drilling revenue and a transfer to state coffers of more than US$1 billion in local fuel taxes that were part of the Senate plan.

Despite relief at finishing the job, legislators’ moods through more than 24 hours of debate and vote was somber.

“I have no illusions about the possibility that we may be back” to readdress the deficit, state Senate President Darrell Steinberg said in the middle of the night.

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