MOORLACH UPDATE — Reuters — October 9, 2010

One hundred days!  A new record!  October 8th!  This year’s state budget has been cobbled together and approved by the legislature in the early hours of Friday morning. 

I was under the impression our Governor would wait a few days to sign the budget in order to conclude pension reform negotiations with the remaining bargaining units which have not agreed to second tiers for new hires.  Apparently, legislation accompanying the budget provides for the reforms the Governor requested, which requires current state employees to contribute more toward their retirement, rolls back the new employee tier rates to those in place before Governor Davis signed SB 400 in 1999, and addresses pension spiking.  Consequently, the Governor signed the budget within hours of its passage.  Let me congratulate the Governor on accomplishing pension reforms similar to those Orange County did last year.  Pension reform has to start at the top and now the remaining counties and our cities should be negotiating the same concessions in their deliberations with their public employee unions.

Regretfully, this new budget just gets us over the line and still defers the systemic problems into next year’s budget.  The state has to have a budget in place in order to pay bills incurred since July through today (day 101).  In order to have the necessary cash to pay these bills the state needs to borrow it.  Bond buyers will not purchase the state’s debt without a budget.  Now we have a budget, as disappointing as it may be.  On this point Governor Schwarzenegger is leaving the state where he found it seven years ago—with an annual $20 billion hole.  If you can’t fix it, then patch something together, and leave the mess for the next Governor.  Now the voters will have to decide which of the gubernatorial candidates is best suited to address and reform this fiscal mess.  The state is a turnaround candidate.  Let’s hope our next Governor has the financial acumen to stop the gimmickry and unrealistic assumptions and address our accumulation of debts.

How does waiting 100 days impact the County?  I sit on the CalOptima Board.  CalOptima has been depleting its reserves for the last three months in order to pay physicians and hospitals providing MediCal services to our most vulnerable citizens.  CalOptima has just about depleted those reserves.  I also sit on the Orange County Transportation Authority Board (OCTA).  Without state funding for specific projects, they linger and languish.  This means that for a state that wants to generate new “jobs,” it has kept construction workers out of work for 100 days on those new projects!  The County of Orange will now have to adjust its budget, passed four months ago, for the state funding numbers that differ from our conservatively assumed amounts.  We should find out soon whether we were accurate on our budget projections, if further cuts need to be made, or if we were too conservative.

The wire service Reuters, which is published in newspapers around the country, covers this historic event below.

California budget approved 100 days late

* Budget goes to governor, who’s expected to sign it

* Local governments need state funds, want budget ASAP

* Investors want to see more details

By Jim Christie

SACRAMENTO, Calif., Oct 8 (Reuters) – California lawmakers on Friday approved a state budget filled with spending cuts and creative accounting to fill a $19.1 billion deficit, 100 days after a spending plan should have been in place.

But critics fear the governor to be elected on Nov. 2 will immediately face a new shortfall as the budget’s rosy revenue assumptions prove unfounded. That’s a familiar story for California, which has seen its revenue plunge in recent years due to recession as well as turmoil in financial and housing markets.

Both chambers of the Democrat-led Legislature endorsed the budget, hammered out by top lawmakers and Republican Gov. Arnold Schwarzenegger last Friday to end a record stalemate over a spending plan for the most populous U.S. state.

State Senate President Pro Tem Darrell Steinberg said the process had been particularly tortuous, given the weak economic background.

"We’ve done more than OK," he said.

Schwarzenegger must still sign the budget, which may avert the embarrassment of California resorting to IOUs later this month. Last year, contractors were given IOUs during a lengthy budget impasse while investors holding state bonds were paid on time, following state Constitution guidelines.

State Treasurer Bill Lockyer needs an enacted budget to move forward with plans for issuing billions of dollars in short-term debt to raise money for the state government’s cash-flow needs.

How municipal debt investors respond to the planned sales of the debt, called revenue anticipation notes, depends on the extent of financial gimmicks in the budget, said Marilyn Cohen, president of Envision Capital Management of Los Angeles.

Schwarzenegger and top lawmakers negotiated the budget agreement behind closed doors. The deal’s outline was announced on Wednesday, but in the last-minute rush of compromising, some details were unclear.

California, the biggest issuer of U.S. municipal bonds, has a long history of late budgets that include provisions that raise the eyebrows of public finance analysts.

"Investors want to see something substantive," Cohen said.

Democrat Jerry Brown, the state’s attorney general and a former governor, and Republican Meg Whitman, the former chief executive of eBay Inc, aim to succeed Schwarzenegger, who cannot run for governor again because of term limits.

ANXIOUS LOCAL GOVERNMENTS

In contrast, local officials waiting on state funds held back during the budget stalemate — the state has $8 billion in unpaid bills for a variety of programs and projects — said a spending plan cannot be enacted soon enough.

"You’ve got to get things moving. You’ve got to patch something together to keep operations going," said John Moorlach, an Orange County supervisor.

Having a state budget in law is "extraordinarily important," added Mayor Chuck Reed of San Jose, California’s third-largest city.

The finances of local governments won’t be clear until local officials learn whether or not the state will tap their coffers, Reed said.

"The instability it creates all across the state is bad for the state, bad for business," he said.

Schwarzenegger and top lawmakers last Friday notched a budget deal as California entered the fourth month of its fiscal year, which began July 1, without a spending plan.

They compromised on spending cuts and raising revenue and signed off on rosy assumptions about tax collections and financial aid from Washington.

Tax hikes were excluded in the $87.5 billion budget plan at the insistence of Schwarzenegger and Republican lawmakers.

The plan’s centerpiece is a spending reduction of $7.5 billion. It includes $1.2 billion in revenue from postponing a corporate tax break. Another $2.8 billion is added from transfers from state funds.

Democrats had resisted Schwarzenegger’s push for $12 billion in cuts and pressed for delaying the tax break.

The plan would also provide for a reserve of more than $300 million, put to voters a measure in 2012 to bolster a rainy-day fund and roll back public pension increases for new state employees approved in 1999. Schwarzenegger had said he would not sign a budget unless it included pension reforms.

The plan includes the expectation of $1.4 billion in higher than previously forecast state revenue, when it is unclear revenue will rise, given California’s dire economy and double-digit unemployment rate.

Additionally, the plan expects $5.3 billion from Washington, which so far has promised only $1.3 billion.

Moorlach doubts those assumptions — and predicted Schwarzenegger’s successor will face the same financial problems he has in recent years: "It just gets us over the line and leaves the systemic problems in place."

Brown and Whitman will have a clearer financial view of what awaits California later on Friday, when State Controller John Chiang is expected to post his monthly revenue report.

(Reporting by Jim Christie; Editing by Jan Paschal)

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