California Looking at Massive Budget Cuts

by: Tim Iacono

The Sacramento Bee reports that Gubernator Arnold Schwarzenegger vowed to "go all out" to slash spending after voters rejected lawmakers' proposed solutions to close a portion of the gaping budget deficit two days ago.

Wednesday marked a flurry of Capitol activity after election results expanded the state's projected fiscal gap by $6 billion – from an estimated $15.4 billion to $21.3 billion. A joint budget committee announced that it will begin a marathon series of meetings today.
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Schwarzenegger promised to make severe reductions in education, health care and law enforcement. "Every department, every agency, every board needs to essentially be on the table for consolidation, downsizing and, in some cases, elimination," said Assemblyman Sam Blakeslee of San Luis Obispo, who will become Assembly GOP leader June 1.

Layoff notices are already arriving as detailed in a separate report at the Bee, some 5,000 state workers receiving notices this week alone.

And it looks as though elected officials who have thus far failed to make the tough budget decisions may be in for a hefty pay cut as discussed in this story, also at the Bee.

Declaring that elected officials must share the pain of California's fiscal crisis, an independent commission voted Wednesday to impose an 18 percent future pay cut for statewide elected officials and all members of the Legislature.
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The pay cut approved Wednesday won't go into effect until December 2010 because the California Constitution prohibits cutting the salaries of elected state officers in the middle of their terms. That leaves open the possibility that the panel could undo the cut next year when it meets, although the commission expressed no sentiment for such a move.

Well, there's another part of the system that needs fixing - after what we've been through over the last six or eight months, a pay cut set to take effect in 18 months is virtually meaningless in the broader scheme of things, though it may provide some passing gratification for those who only read the headline.

Maybe a better headline might be, "Pay cuts for California lawmakers delayed 18 months".

They're probably going to have to make even deeper cuts than previously envisioned as it appears the Federal government is not willing to step up and back state bond offerings more than it already has.

According to this story at Bloomberg, California will be largely on its own to raise money.

The Federal Reserve told a congressional committee today that it is reluctant to extend guarantees to California and other municipal market borrowers struggling to sell bonds.

The House Financial Services Committee, chaired by Massachusetts Democrat Barney Frank, is conducting hearings on four municipal finance bills, including one that would give the Fed authority to guarantee the repayment of variable-rate bonds and short-term notes. Another measure would create a public finance office in the Treasury Department to reinsure $50 billion of municipal bonds through 2015. Insurers, including MBIA Inc. and Ambac Financial Group Inc., lost top ratings, limiting the value of that coverage.

The Fed is “quite concerned” about guaranteeing municipal bonds, David Wilcox, the deputy director of the Fed’s research and statistics division told lawmakers this morning. The Fed could suffer losses if it ended up holding long-term municipal securities that it had to sell to shrink its balance sheet after it provided short-term guarantees, he said.

Their "concern" is certainly understandable.

Kind of like China being "concerned" about all their dollar-denominated assets in light of what's going on in Washington at the Treasury Department and Federal Reserve.