Schwarzenegger declares state fiscal emergency

Friday, December 19, 2003

SACRAMENTO, Calif. -- Gov. Arnold Schwarzenegger declared California in a fiscal crisis Thursday and invoked emergency powers so he could impose $150 million in spending cuts without the legislature's approval. The cuts, expected to come largely from social service programs, free up money for city and county governments that have lost more than $300 million since the governor voided an unpopular tripling of the state's car tax. In all, he plans to cut about $150 million in spending by the time the emergency powers expire on June 30, the end of the fiscal year. That's still small change in the context of California's budget woes. If current spending and revenue don't change, the state could face between a $12 billion and $24 billion deficit by the middle of 2005.

California got more bad news from Wall Street on Thursday, when another agency lowered the state's bond rating -- already the lowest of the 50 states -- to just above junk bond status. Schwarzenegger said he was not concerned and expects the rating to rise as his budget plan develops.

Repealing the car tax increase was Schwarzenegger's first official act as governor after voters ousted Democrat Gray Davis in a recall election, but the actor-turned-governor has yet to replace the billions of dollars the tax would have generated for local government services, particularly police and fire services.

The same budget agreement between Davis and the Legislature that increased the car tax gave the governor the one-time power to cut this year's budget without legislative approval.

Some legislators said Thursday they were surprised by Schwarzenegger's emergency declaration and said it is the wrong way to react to budget problems.

"I think a lot of us are worried about where he's going to get the money from," said Democratic Assemblyman Joe Nation. "I don't think you get yourself out of a hole by digging deeper -- his action just means that there will be more devastating cuts down the road."

Although some Democrats have questioned the legality of Schwarzenegger's move, Democratic state Controller Steve Westly -- who will be the one to issue the checks to local officials -- said he supports the idea and believes it is legal.

"Our police officers and firefighters must not be held hostage," Westly said. "This is an appropriate but temporary solution. The governor and the Legislature now have six months to cut waste and solve California's fiscal crisis."

Schwarzenegger has sponsored legislation to repay cities and counties with reserve funds, but Democrats -- who form the majority in both houses -- say the state can't afford the expense without imposing deep cuts that they won't do.

Last week, Schwarzenegger reached a bipartisan agreement with Democrats to place a $15 billion bond and new spending limits on the March ballot in the effort to handle the state's multibillion-dollar budget deficit.

However, that move, on top of California's already precarious finances, led to further troubles for the state on Wall Street.

Wall Street rating agency Fitch Ratings lowered the state's bond rating Thursday to just above junk bond status, citing "California's widening budget gap, its intention to increase the amount to be raised from deficit funding and the magnitude of measures necessary to restore balance."

Earlier this year, Moody's Investors Service and Standard & Poor's made similar moves.

The lower credit ratings could cost taxpayers millions in higher interest on the billions of dollars the state will likely need to borrow. If the state's credit falls below junk bond status, big mutual funds won't able to buy California bonds, causing the state to pay even higher interest rates among smaller investors and even risk being unable to raise all the money it needs.

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