Sunday, February 15, 2009

California Fails to Close Budget Gap, Faces "Financial Armageddon"

In what could be the final blow to California's crumbling economy as it faces a $42 billion budget deficit, the WSJ reports that a vote to reach a complex plan to close the budget was unsuccessful by 1 vote.

Many Republicans are unwilling to raise taxes to deal with the state's historic deficit, but at least three GOP votes were needed in each house for the two-thirds majority required to pass the budget.

"My guess is everybody's arm is getting twisted," said Sen. Dave Cox, a Republican who had been among the Democrats' best hopes for a deal. "My answer is no, and I'm not looking for additional information. I've made my decision."

After Predator hunter Dutch (aka Schwarzenegger) had said that he would start laying off 10,000 state employees if a deal was not reached by Friday as the state is facing "financial Armageddon", he later backed off on these threats as it seemed a deal was imminent. However, turns out late last night things went from bad to worse as no decision was forthcoming in the California state Assembly, and members were being held hostage until a decision is reached.

The lack of Republican votes in the Senate pushed the session into the early morning hours of Sunday. Assembly Speaker Karen Bass, a Democrat, locked down her chamber about 3:30 a.m., forcing lawmakers to remain.

"We're short a Republican vote over there [in the Senate]," Ms. Bass said. "Somebody that committed backed away. That means we're not going anywhere.
Sorry, guys."

After meeting all night and into midmorning, the Assembly called a three-hour recess at 10 a.m. but members were ordered not to leave the building. A half-hour later the Senate also recessed until 1 p.m., but allowed members to leave.

Assemblyman Tom Ammiano, also a Democrat, said the Senate deadlock was causing some in the Assembly to have second thoughts about the unpopular plan.

Republican Assemblyman Chuck DeVore said the package didn't "go far enough to reform government, to reduce redundant agencies and reduce waste, fraud and abuse. We are asking the taxpayers of California for too much of their hard-earned money in an attempt to cover over a problem of our own making," he said.

Democrats have decried the $15.1 billion in cuts in the budget-balancing package, more than half of which would come from education, while Republicans are unhappy about $14.4 billion in temporary tax increases.
Seems Arnie has cornered himself and his state in a plan that is unpopular with both parties, and every day of delays brings his state closer to a full blown default.
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Broken said...

California is constitutionally required to pay municipal bond debt before all other payments besides education. Since education and debt payments equal ~$45 billion of the $140 billion in state spending, the deficit would have to reach -$100 billion before munis would be in danger of default.

Nevertheless, Sacramento has demonstrated such mid-bending incompetence it wouldn't surprise me if the near-term liquidity fallout resulted in some muni payments being "delayed".