California Budget Talks Continue as Impasse Nears Deadline

(Updates with comment from Brown in fourth paragraph.)

Michael B. Marois

June 13 (Bloomberg) -- California Republican lawmakers negotiated through the weekend with Governor Jerry Brown and Democrats over whether to extend more than $9 billion of expiring tax increases as a deadline to pass a budget looms.

The talks followed the June 10 defeat in the Senate of a proposal by Democrats to push the expiration date back a year. The bridge financing is needed, Brown has said, to preserve revenue pending the outcome of a yet-to-be-determined statewide referendum on whether to keep the taxes for five years. Republicans say the extensions would harm California’s economy.

Brown, 73, took office in January with a pledge to fix the fiscal malfunctions that left California with an A- credit rating from Standard & Poor’s, its lowest for any state. He began the year facing a $26 billion deficit through June 2012. Spending cuts passed in March and higher-than-projected revenue have narrowed the gap to $10 billion. Still, the state faces a cash shortage next month if a workable budget isn’t passed by the July 1 start of fiscal 2012.

“We have a plan and it’s a very good plan, it will put California’s finances on a firm footing for many, many years to come,” Brown said in a video posted last night on YouTube. “But what we don’t have are the four Republican votes necessary to put it to the vote of the people of California.”

Jockey

Brown said the budget will be considered by lawmakers on June 15 “one way or another.” He scheduled a 10 a.m. press conference for today.

The key to getting a spending plan through the Legislature, where Democrats lack the two-thirds majority needed to raise taxes, may hinge on finding an agreement that enough Republicans will support. Republicans have been using their position to jockey for concessions on spending levels, cuts to government pensions and business and environmental regulations.

The governor’s plan relies on retaining a 1 percentage- point boost in the retail-sales levy, to 8.25 percent, and a 0.5 percentage-point increase in vehicle-registration fees to 1.15 percent of value. Brown also seeks to extend a reduction of the annual child tax credit to $99 from $309. All were put in place in 2009 and are set to expire by July 1.

June Ballot

Brown originally wanted a vote this month, which would have negated the need for the bridge financing. Negotiations with Republicans over a June ballot faltered in March. Democrats said they would be willing to compromise on the length of bridge financing.

“If you want to look at it as the glass half full, we have completed 90 percent of the budget work over here in the Senate,” said Senate President Pro Tem Darrell Steinberg, a Sacramento Democrat. “But it’s the remaining 10 percent that is the biggest issue. It’s the revenue piece.”

“Discussions are continuing,” Steinberg said.

Republicans, looking at public polls showing that voters would reject the extensions, want lawmakers to pass a balanced budget without prolonging the revenue measures and let voters decide later whether to reinstate the tax increases.

Local Taxes

In response to the June 10 defeat, Senate Democrats passed a bill that would let local governments ask voters to increase taxes on goods and services that currently are taxed only by the state. Those items include income, retail sales, vehicle registrations, cigarettes and alcohol.

California Controller John Chiang, a Democrat, has warned Brown and lawmakers that California may run out of money if there’s no budget in place by July 1, forcing the state to issue IOUs, as it did in 2009. That’s because the state likely won’t be able to go to Wall Street for short-term borrowing until it has a plan that accounts for how the money will be repaid.

In November, voters narrowed the legislative margin needed to pass a budget to a simple majority from two-thirds. The same measure also strips the lawmakers of salary and per-diem pay starting June 16 for every day they’re late with the spending plan.

Weighing on negotiations is a U.S. Supreme Court ruling last month requiring the state to ease prison overcrowding. Brown says his plan is the best way to avoid putting thousands of inmates on the street.

--Editor: Stacie Servetah, Jerry Hart

To contact the reporter on this story: Michael Marois in Sacramento at [email protected]

To contact the editor responsible for this story: Mark Tannenbaum at [email protected]