California strikes deal on $26bn deficit

By Matthew Garrahan in Los Angeles

Published: July 21 2009
California took a step towards ending its long-running fiscal crisis late on Monday evening when Arnold Schwarzenegger, the governor, struck a provisional agreement with the state government to close a $26bn deficit.
Mr Schwarzenegger said that the deal would include new borrowing and spending cuts of around $15bn, but there would be no new tax increases.

“We accomplished a lot,” said Mr Schwarzenegger. “In this budget we make government more efficient and also we are cutting the waste, fraud and abuse in some of the programmes.”

The agreement could bring to an end a stalemate that has crippled California for months, to the alarm of the White House.

The state, the most populous in the US, has been forced to write thousands of IOUs to creditors. Its credit rating has been slashed to a couple of notches above “junk” status, giving it the worst rating in the country.

The preliminary agreement should bring some respite to California’s short term economic woes. However, the scale of the cuts is likely to intensify the social impact of the economic slump that is ravaging the state.

The agreement involves cutting nearly $6bn from schools and community colleges and close to $3bn from the state’s university system, although Mr Schwarzenegger said education cuts would be fully “refunded”.

An additional $1.3bn will be cut from Medi-Cal, the health programme for low earners and the poor.

CalWorks, the state’s welfare-to-work programme – and the target of much criticism from Mr Schwarzenegger – will have its funding cut by $528m, while Healthy Families, a programme that provides health insurance for 930,000 low-income children, will be cut by $124m.

The state’s in-home support services programme for the frail and disabled will also have its funding slashed. Mr Schwarzenegger has maintained that the system is a hot-bed of fraud abuses and won approval to begin fingerprinting care-givers and recipients of aid.

Another contentious part of the agreement will clear the way for oil drilling to resume off the coast of Santa Barbara. The prospect of drilling in the area has attracted a lot of criticism and is likely to be fiercely contested by local residents and environmental campaigners.

Karen Bass, the Democratic speaker of the California assembly, said the deficit had been closed in a “responsible manner”.

“During this time of economic recession… people need a safety net,” she said. “We did not eliminate the safety net.”

But Darrell Steinberg, the Democratic Senate leader, was more downbeat. ”There isn’t a whole lot of good news in this budget,” he said.

The deal represents a victory of sorts for Mr Schwarzenegger, who made reform of California’s government a condition of any deal.

Mr Schwarzenegger has faced criticism for refusing to budge during the course of negotiations, but told the Financial Times recently that he was not playing a high-stakes game of chicken. “This is not about who blinks first,” he said.

Unemployment in California is running at more than 11.5 per cent, higher than the national average, while businesses are leaving the state, lured by more appealing tax regimes in states such as Colorado and Texas.
Copyright The Financial Times Limited 2009

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One comment

  1. The cuts that have been made effect areas of society can least afford the changes education, health care and social programs that help relief receiptents back into the tax paying workforce. Long-term this creates more problems then it actually solves.Most importantly, this short term fixs will have to be revisted in the near future.

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