By JUDY LIN, Associated Press Writer

Sunday, February 14, 2010

(02-14) 09:00 PST Sacramento, Calif. (AP) —

Last year, California furloughed state workers, froze spending on public works projects and issued IOUs to state contractors, becoming the poster child for fiscal disasters undercutting state budgets across the country.
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This year’s forecast: more of the same unless Gov. Arnold Schwarzenegger and state lawmakers learn to get along.

“Here we go again,” said state Controller John Chiang, warning lawmakers that the state will run low on cash this spring unless they make adjustments in the weeks ahead.

California is falling $6 billion short of the revenue it needs to fund basic programs in the current fiscal year and is projected to be short by another $14 billion in the fiscal year that starts July 1.

Lawmakers will begin meeting in a special legislative session as early as this week to begin tackling the latest crisis.

The dynamics that have led to the mammoth budget deficits are the same as in recent years: ongoing spending commitments that cannot be covered by incoming tax revenue, which has plummeted as the national recession has hammered California’s economy.

California already has the lowest credit rating of any state, making it more expensive to borrow money for road improvements, levee repairs and other projects. The high cost of borrowing led the state treasurer to halt the sale of all state bond sales last month.

Investors have scaled back investing in the state’s general obligation bonds, opting instead for revenue-backed bonds issued by utilities and toll roads, which are secured by a dedicated source of funding.

The state risks further credit downgrades, which would increase the cost of borrowing even more.

Republican U.S. Senate candidate Carly Fiorina has even gone so far as to suggest that California should not rule out filing for bankruptcy, although her campaign later said she was speaking figuratively about the need to repair the state’s finances. In reality, that’s not an option for California. U.S. bankruptcy law allows local municipalities to file for bankruptcy protection, but not states.

Still, it’s hard to argue that California’s financial condition is anything but a mess, with no solutions in sight.

Schwarzenegger and state lawmakers have cut more than $18 billion, or nearly 18 percent, from general state spending over the past two years, affecting public schools, higher education, health care for the poor and in-home support for the frail. Temporary tax hikes enacted last year will begin to expire at the end of the year, threatening to widen the budget deficit.

Lawmakers are expected to begin tackling some of the governor’s budget proposals in the coming week as part of the special legislative session.

The emergency budget session, called by Schwarzenegger, will not tackle the entire $20 billion deficit that is projected over the next year and a half. It will target the $6 billion shortfall in the current year, leaving longer-term funding for core services such as public schools, colleges and health services in a state of uncertainty.

“The state has a difficult period ahead,” said David Blair, municipal bond analyst at PIMCO investment firm. “Ultimately, people are nervous about a long budget deliberation … (that) will cause a mounting cash flow shortfall. I think we’re looking at IOUs again.”

Last July, the governor and lawmakers failed to pass a balanced budget in time to respond to a precipitous drop in tax revenue. That meant California was unable to obtain short-term financing to cover day-to-day bills, forcing the state controller to issue IOUs to thousands of state contractors and vendors.

Schwarzenegger, who is in his final year in office, is trying to remain upbeat. He has called on Democrats and Republicans to work together, knowing that will be made even more difficult because most of them are up for re-election or running for higher office.

He also is pushing long-term government reforms, such as containing the cost of pension benefits for state government workers.

“I know it is a political year, election year. But I still have great confidence that we can find those post-partisan moments,” the Republican governor said last week.

Democrats, a majority in both houses of the Legislature, already have criticized Schwarzenegger’s January budget proposal, which cuts deep into social and health programs unless the federal government comes to the state’s aid.

According to state finance officials, the federal budget proposed by President Barack Obama provides only about $2.1 billion of the $6.9 billion the governor is seeking from Washington, D.C.

If that funding holds, Schwarzenegger and a fractured state Legislature would have to figure out how to bridge the multibillion-dollar deficit on their own.

Democrats have vowed to fight what they consider to be draconian cuts that could force families into homelessness and drive the disabled and elderly out of their homes and into more expensive care at taxpayers’ expense. They say social services have been cut enough.

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