California Democrats Try to Bypass Two-Thirds Rule Amid Impasse

Jun 27, 2009 3 Comments ›› Erik Wong

Bloomberg:

By Michael B. Marois and Darrell Preston

June 29 (Bloomberg) — California lawmakers remain deadlocked over how to fix a $24 billion deficit that threatens to leave the state broke in July, after Democrats sought an end-run around a rule requiring a supermajority vote to raise taxes.

The Assembly last night began passing a $23 billion package of tax increases, spending cuts and accounting maneuvers by a simple majority rather than the required two-thirds vote. The Democrats argued that the tax bills needed only a simple majority because they cut some taxes, while increasing others in equal amount and raised fees that don’t require the two-thirds approval requirement.

Governor Arnold Schwarzenegger, a 61-year-old Republican, vowed to veto the plan if it reaches his desk and Democrats don’t have enough votes to override. He vetoed a similar proposal in December and has promised to reject again any bill that raises taxes to fill the gap. The spending cuts require a two-thirds vote in order to take effect immediately. Under a simple majority vote, the cuts take effect in 90 days.

“He will absolutely veto,” Schwarzenegger Press Secretary Aaron McLear said of the simple majority package. “If the Legislature spent as much time working to solve the problem as they do on floor drills we’d be a lot closer to a deal.”

California, a state that is the equivalent to the eighth largest economy in the world, will likely run out of cash in July after the national recession sapped expected tax revenue by more than 20 percent in the fiscal year that ends June 30.

Spending Cuts or Tax Hikes

Democrats, who control the legislature, are at an impasse with Republicans and Schwarzenegger over whether to make up the difference with spending cuts or tax increases. Absent a fix by July 1, the state will begin issuing IOUs to pay bills.

The Assembly was scheduled to remain in session past midnight California time, taking up and debating the 14 bills that are part of their majority-vote package. The Senate was scheduled to take up the bills today.

“We are facing the real prospect of running out of cash here in California,” said Assemblyman Chuck DeVore, an Irvine Republican. “What we are dealing with here is an utter lack of compromise.”

Republicans argued that the measures violate California’s Constitution, which requires all taxes be approved by a two thirds vote.

The impasse, combined with the severity of the decline in the state’s economy, led Fitch Ratings on July 25 to lower California’s credit rating to A- from A.

California 5 percent tax-exempt bonds due in 2037 sold to a customer in a $1 million-plus block last week at about 83.5 cents on the dollar to yield 6.25 percent, according to Municipal Securities Rulemaking Board trade data. That’s down from 87.3 cents and 5.93 percent on June 9.

Credit Rating Warning

The state’s $59 billion of debt is rated A2 by Moody’s Investors Service, five steps above non-investment grade, and a comparable A by Standard & Poor’s. Both of those companies have also warned of reductions if lawmakers don’t quickly act.

Lawmakers ended a similar impasse in February after four months, when they struck a deal to temporarily raise $12 billion in taxes and cut spending by $16 billion to help close what was then a $42 billion deficit. One-time funds, accounting maneuvers and federal stimulus money filled most of the rest.

Part of that package was a ballot measure asking voters to approve the sale of $5 billion of bonds backed by state lottery proceeds. The measure was rejected during a special election May 19. That added $5 billion to the current shortfall.

Cuts Versus Taxes

Schwarzenegger and Republicans want to cut as much as $19 billion in spending, including scrapping entire welfare programs, removing nearly 1 million low-income children from the state’s healthcare for the poor program and shutting down 80 percent of the state parks. Democrats proposed raising taxes on cigarettes and oil drilled in the state, and adding $15 to the cost of registering a car and dedicating that fee to paying for parks.

Without a balanced spending plan, California Controller John Chiang and Treasurer Bill Lockyer have said, the state will have difficulty securing the short-term loans needed to fund the government until the bulk of tax collections come in later during the fiscal year.

Chiang is preparing to begin issuing IOUs to pay about $3 billion of bills beginning July 2 absent an agreement in the Legislature. It would be only the second time since the Great Depression that the state has had to pay its bills with IOUS.

Last week, Democrats tried to pass a stopgap measure that would have delayed paying some bills until later in the year or into the next fiscal year as a way to save enough money to avoid the need for IOUS.

The measure passed in the Assembly with Republican support. It failed in the Senate after Schwarzenegger said he would veto the bill, telling lawmakers that it didn’t solve the underlying problem.

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net. Darrell Preston in Dallas at dpreston@bloomberg.net;