As California budget deadlock drags, state set to pay steep price

With California politicians locked in a stare down over the now 50-day-late state budget, state employees and the state's fiscal standing stand to be the biggest losers.

California state Controller John Chiang said Thursday he will have to issue IOUs in the next two to four weeks to keep the state solvent as it tries to close a $19 billion gap between expenses and revenue – a move that could hurt California's bond rating.

Meanwhile, Gov. Arnold Schwarzenegger on Thursday ordered 144,000 state employees to take unpaid furloughs three days a month, beginning next week and continuing until a budget is agreed upon.

“The Republicans are arguing for all cuts and the Democrats are arguing for some additional revenue through new taxes or delaying corporate tax cuts or extending existing tax increases passed last year,” says Steve Levy, president of the Center for the Continuing Study of the California Economy.

The furloughs reportedly save the state $136.7 million per month in payroll costs – tiny in comparison to the budget shortfall. But rather than a scapegoat move by Governor Schwarzenegger – as some have accused – they represent "a diversion from the key disagreements," and a way to exert "leverage over the legislature,” says Levy.

But Mr. Chiang averred Thursday that this year’s budget impasse is all about politics.

“Last year, our steep drops in revenue were a symptom and product of a global recession outside of our control,” said Chiang in a statement. “The fiscal crisis that we face today is 100 percent avoidable – and the only thing standing in our way is the absence of leadership."

Experts say the scope of the current crisis was known months ago, but politicians have procrastinated, fearing that the budget would fuel voter anger against incumbents in elections this November.

“Every forecaster on the planet said ‘this is coming, this is coming, this is coming,’ and [legislators] could have precluded it but they haven’t,” says Barbara O’Connor, director of the Institute for the Study of Politics and Media at Sacramento State University. “They haven’t because the partisanship is rampant and they have an election in the fall and no one wants to deal with the consequences of an angry electorate if you’re an incumbent.”

Meanwhile, the state is in danger of losing its investment grade bond rating, something Chiang says would cost the state hundreds of millions in interest. If that were to happen, "we would have to pay anywhere from 20 to 40 percent interest to borrow," Chiang said. “It would, in essence, place a tremendous hidden tax burden on the people of California.”

Democrats hold a majority in the statehouse but fall short of the two-thirds threshold needed to approve a budget by themselves. When asked what is holding things up, they point at the other side.

"I'm sure the controller does not endorse the draconian cuts pushed by the governor," said state Senate President Darrell Steinberg in a statement. "We're ready to close on a budget that ensures our kids can still receive a quality education and protects our state and our people from economic collapse."

But neither side wants to blink first, says O’Connor, and the necessary urgency doesn’t seem to be there.

“The governor even said, ‘Let’s wait until the new governor comes in,’ " O'Connor points out. "But the consequences of that for the state of California and its citizens [are] truly awful in terms of debt service and bond ratings and IOUs ... and the loss of income for these state employees,” she says.

Attorney General and Democratic gubernatorial candidate Jerry Brown spoke out against furloughs Monday in his weekly call-in to San Francisco radio station KGO.

"Look, they've got to make the cuts," Brown said of state leaders. "They've got to find, whatever they can do. Move functions in local government, find some fees ... talk to Obama, get some more bailout," he said.

"Their back is to the wall, and the reason is they didn't make the hard decisions in January or February when they could have gone to the voters to ask to be relieved of certain constitutional mandates," or to let voters decide what to cut.