Brown Faces ‘Sack Full of Nasty’ as Business Group Backs Plan

Wednesday, 09 March 2011 08:28 AM

California Governor Jerry Brown’s self-touted political acumen will be put the test as his plan to erase a resurgent $25.4 billion deficit goes before the state Legislature.

Lawmakers in the capitol in Sacramento are scheduled to begin voting as early as tomorrow on his package of budget bills and companion measures that would slash spending by $12.5 billion and call a special election in June for voters to decide on extending more than $9.3 billion of tax increases.

Brown, a 72-year-old Democrat, is facing resistance from Republicans who oppose the tax extensions. While the governor won the backing yesterday of a Silicon Valley business group, Brown’s credibility is on the line if the package fails after he promised voters he could solve California’s annual budget crisis without gutting public education, said Jack Pitney, a political science professor at Claremont McKenna College.

“That’s a sack full of nasty,” said Pitney at the college in Claremont, California. “On one hand, he doesn’t get any credit for legislative skills and he doesn’t bridge the partisan divide as promised. And then he has to tell a state full of parents that their kids’ class sizes are going to increase dramatically.”

U.S. governors face deficits totaling as much as $125 billion in the coming fiscal year, according to the Washington- based Center on Budget and Policy Priorities. California’s financial strains have left it with the biggest deficit among the states and the lowest credit rating. With an economy bigger than Russia’s, California has fought its way through a combined $100 billion of shortfalls in the past three years.

Courting Business Backing

Part of Brown’s strategy has been to court business leaders to help sway Republicans, whose support he will need to get a two-thirds majority in both chambers of the Legislature for calling the special election. The Silicon Valley Leadership Group, whose more than 300 members include Google Inc. and Stanford University, said broad tax increases are preferable to targeted levies that would harm individual industries or income groups.

“Painful cuts as well as those temporary tax extensions for five years are core to finding common ground,” Carl Guardino, president of the Silicon Valley group, said yesterday after endorsing Brown’s proposal. “If it’s important for California, then we should all have skin in the game.”

The California Chamber of Commerce said it would back lawmakers who may face criticism from anti-tax groups for agreeing to Brown’s tax-extension plan. The 15,000-member organization, based in Sacramento, hasn’t endorsed the governor’s budget.

Law Enforcement

“This will provide for a balanced budget for the foreseeable future,” said Allan Zaremberg, the group’s president, in a telephone interview. “That will provide the certainty that’s going to lead to more investment in California.”

State law-enforcement leaders two days earlier backed a cornerstone of Brown’s plan that calls for shifting public safety and welfare programs to local governments. Money from the tax extensions would finance that change for the first five years. In a statement, Brown cited letters and statements from the California Police Chiefs Association, the California State Sheriffs’ Association and the California Peace Officers’ Association, among others.

The tension over the budget and the showdown in the Legislature have helped push the extra yield that buyers want for 10-year California bonds up almost 10 percent since the one- year low on Jan. 17 to 136 basis points, compared with top-rated municipal debt, according to a Bloomberg Valuation index. A basis point is 0.01 percentage point.

Tax-Increase Extensions

Brown, who was governor from 1975 to 1983, proposed asking voters to retain a 0.25 percentage-point increase in personal income-tax rates; a 1 percentage-point boost in the retail-sales tax rate, to 8.25 percent; an increase in the rate for auto- registration fees of 0.5 percentage point, to 1.15 percent of a vehicle’s value; and a reduction of the state’s child tax credit to $99 from $309. The taxes were raised in 2009 when former Governor Arnold Schwarzenegger and lawmakers faced a $42 billion deficit. They are set to expire this year, and Brown proposes to retain them for five more.

Without the extended tax increases, Brown vowed to cut even more to close a deficit that’s equal to 20 percent of discretionary spending in a total budget of $84.6 billion. Further spending reductions would have to come from schools and police protection, he said.

Budget Deadline

Brown urged lawmakers to approve his plan by March 10 or soon thereafter to give officials the three-month lead time they need prepare for the special election. He said he wants to know the outcome of that vote before the constitutional deadline of June 15 for the Legislature to send him a budget. Last year’s financial plan was passed a record 100 days into the fiscal year, which begins July 1.

The governor’s budget has met with resistance from some Democrats. They oppose the scope of cuts including $1.7 billion from health care for the poor, $1.5 billion from welfare and $1.4 billion from public universities and community colleges.

Republican lawmakers say Brown’s budget doesn’t cut enough and propose reducing pensions for public workers, easing environmental regulations and seeking voter approval for a constitutional cap on spending.

Brown met yesterday with five Republican senators to work on a possible compromise involving those issues and demanded by the lawmakers in return for their votes on his budget plan. Brown has said he’s willing to consider “reasonable reforms.”

California shares with Illinois the lowest credit rating of any state from Moody’s Investors Service. The A1 grade is Moody’s fifth-highest. Standard & Poor’s rates California A-, its fourth-lowest level for investment-quality securities.

“Investors are truly concerned,” said Don Backstrom, a managing director and principal of Backstrom McCarley Berry & Co., a San Francisco-based municipal bond underwriter. “They are telling us that they are concerned about how this is going to turn out.”

© Copyright 2019 Bloomberg News. All rights reserved.

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California Governor Jerry Brown s self-touted political acumen will be put the test as his plan to erase a resurgent $25.4 billion deficit goes before the state Legislature.Lawmakers in the capitol in Sacramento are scheduled to begin voting as early as tomorrow on his...
Wednesday, 09 March 2011 08:28 AM
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