"But the stakes are higher this time. California will run out of cash at the end of August, according to the state controller, and the state has already maxed out its credit card for borrowing from Wall Street. The state's credit rating is so low that it had to rely on the good credit of seven banks just to borrow $11 billion to stay afloat through August. California's dismal credit rating threatens to fall further, making it more expensive to issue bonds in the future."

"If there is no spending plan in place as of July 1, the state will begin issuing IOUs to legislative employees and vendors that provide the state with goods and services, such as office supplies for state agencies."

Senate Democrats proposed a budget Tuesday with just one tax increase: a temporary half-cent sales tax to pay back more than $10 billion in loans. The Democrats abandoned Davis' proposal for tax increases on cigarettes and high-income earners. They proposed cuts that would eliminate a tax credit for manufacturers; delay the opening of the new University of California campus in Merced; shut down the California Arts Council, which funds art programs in schools; and close the state's foreign trade offices.

MattWalsh: Yes, let's not support manufacturing so that we can foot the bill for more illegal aliens and welfare recipients. The goose is nearly dead anyway.

The California experience is more extreme by far than what is happening in the other states, but the maneuvering in California to avoid more outright spending cuts is illustrative of maneuvering in state capitals everywhere. In February, for example, the Davis administration sold for $2.5 billion California's right to collect over the next 25 years a total of $5 billion or more in tobacco settlement money. Roughly $30 billion of the $38 billion deficit, in fact, is being dealt with through "borrowing, payment deferrals and other one-time actions," Mr. Williams said.

...

The slowing has been in response to a sharp drop in state tax revenue, which rose precipitously in the booming late 1990's, in part as a result of the stock market bubble and the capital gains taxes collected on market profits. As tax revenue rose, spending by the states also increased. So did each state's rainy day reserves, even though many states cut taxes during the good years. Now the reserves have been depleted, forcing the states to increasingly cut back spending or find other ways to balance their budgets as every state except Vermont is required to do by law.

MattWalsh: I guess rather than deal with the problem we're stuffing most of it under the rug. I guess the loans will go away when the next dot com boom doesn't happen.

SACRAMENTO, Calif. - The state Assembly approved a compromise budget Tuesday that covers a record deficit by slashing spending and raising fees, but relies on borrowing that could leave the state facing a financial crisis next summer.

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The budget proposal avoids raising sales and income taxes, but counts on a $4 billion annual car tax increase that state officials triggered earlier this year and the elimination of a tax break for manufacturers.

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The proposal largely protects education funding for the next year. Public health and human service programs are also expected to be maintained at the same levels as last year.

The plan uses a complex tax swap that allows the state to borrow nearly $11 billion to help bridge the state's revenue shortfall.

But because lawmakers could not agree on imposing deeper cuts or raising more revenue through taxes, they delayed for at least a year a decision on how to deal with part of the deficit that could reach $8 billion by next summer.

Because spending has far outpaced tax collections in a slumping economy the past two years, officials forecast earlier this year that California taxpayers would face a $38.2 billion deficit by next July if aggressive steps were not taken.

Passage of the budget should ease Wall Street investor concerns but it's not likely to change the state's low credit rating. Last week Standard and Poor's, one of the country's most influential rating agencies, downgraded California's debt to one notch above junk bond status.

The state budget Gov. Gray Davis plans to sign Saturday sticks a Band-Aid on California's record $38.2 billion deficit but fails to cure its fundamental financial woes.

Even as lawmakers fled the capital and its searing heat Wednesday, the sighs of relief over finally reaching a budget compromise were replaced with the realization that when they return they'll have to defuse a ticking time bomb: a $7.9 billion shortfall.

``Mark my words: This budget solves nothing,'' Sen. Tom McClintock, R-Thousand Oaks, warned his colleagues Sunday night. ``It sets in motion bigger deficits to come. And the day that it is signed will be the first day of the budget crisis of 2004.''

The Legislature, in passing a $70.8 billion general fund budget this week, failed to make the reforms needed to match the state's spending with its revenues despite the governor's promise to institute them and Wall Street's demands for them.

Largely because lawmakers used a series of one-time fixes to patch the deficit, they expect to have to deal with a $7.9 billion shortfall in the next fiscal year's budget.

For two years now, with California engulfed in a fiscal nightmare caused by the dot-com plunge, the state's politicians have put off the day of reckoning.

If they fail to address these issues when they return to town Aug. 18, lawmakers may be trumped by proposals that could be put before voters in March. One might cap spending and another, backed by organized labor, would lower the number of lawmakers needed to pass the budget from two-thirds to 55 percent.

And with the recall election on the ballot Oct. 7, it's unclear whether Davis and the legislators will have the political will to adopt any controversial proposals to change the tax system. Among ideas under review are an Internet tax; an increase in property taxes on commercial buildings; and an expansion of the sales tax to services such as accounting.

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On Saturday, Davis plans to unveil details of his latest proposal to deal with the longer-term budget problems. He is expected to ask a blue-ribbon panel to recommend how to scale back the $7.9 billion deficit as well as how to create ``structural reform that will minimize the likelihood of this occurring again.''

MattWalsh: uhh, how about not spending as much money? Do we need a panel to do that?

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Economists believe the state will be forced either to raise revenue or make even deeper cuts because it has just about run out of gimmicks to balance the budget.

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The spending plan -- which is about $100 billion when other funds, such as transportation, are included -- relies on a laundry list of one-time fixes that even lawmakers refer to as ``smoke and mirrors.'' At the heart of the plan is $10.7 billion in borrowing. There's also a $1 billion bond to pay the state's pension fund contribution; a one-time $2.2 billion infusion of federal funds to counter the recession and $1.5 billion in borrowing against future income from the settlement with tobacco companies.

MattWalsh: Think about this. If you can't pay your bills, you have to get rid of things and spend less. You don't incur more financial load in the form of loans! How can you ever catch up?!? Are we simply assuming another .com boom is coming?

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The wishful thinkers suggest the state should continue to put off a decision on balancing the budget, betting that the economy will rebound and make more program cuts unnecessary. Others suggest, as Davis did earlier this year, raising taxes on the wealthy or asking voters to approve reforms on the March election ballot.

Republicans maintain a cap on spending must be established -- a provision that they failed to secure in the budget compromise.

California currently relies on personal income taxes for about 40 percent of its revenue, with a heavy dependence on a few high-income earners. (MattWalsh: who are already fleeing to Florida and Oregon!) When the dot-com economy collapsed in early 2001, income from capital gains and stock options plunged by more than 65 percent. MattWalsh: So, let's constrict our state further to prevent another economic boom!

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Wall Street downgraded the state's credit rating last week to the lowest of any state in the nation. (Yes, we have a lower credit rating than Arkansas and Mississippi) But the budget deal, since it does not fully address the state's underlying problem, did not appease bond analysts.

``We will not have a stable outlook for California until there is sustained progress in closing the structural deficit,'' said David Blair, a senior analyst with Nuveen Investments in Irvine, which manages California municipal bond funds.

-- MattWalsh - 26 Jun 2003