Schwarzenegger orders third furlough day, proposes new cuts

Schwarzenegger orders third furlough day, proposes new cuts

The governor calls lawmakers' inaction on the budget 'inexecusable' and orders a special emergency session of the Legislature to deal with the deficit, which he says has now swelled to $26.3 billion.

By Shane Goldmacher and Michael Rothfeld

12:32 PM PDT, July 1, 2009

Reporting from Sacramento — Gov. Arnold Schwarzenegger this morning ordered state workers to take a third day off without pay each month after Republican lawmakers acting with his support blocked a Democratic proposal to ease the state's deficit and allow the government to keep paying bills.

The Republican governor unveiled billions of dollars in additional proposed cuts to schools and public universities to deal with a deficit that he says is now $26.3 billion, an increase of $2 billion. He also announced an emergency special session of the Legislature that would allow lawmakers to act on them immediately.

Schwarzenegger criticized lawmakers for engaging in "endless hearings" instead of negotiating and said they had rejected his proposals to overhaul state government with so-called reforms in deference to special interests.

"They are debating about cowtails," Schwarzenegger said, in reference to a bill pending in the Legislature. "This is inexcusable."

The Schwarzenegger administration said the newly released cuts would pare state spending by an additional $4.9 billion.

The latest reductions may be necessary after Tuesday night's inaction further exacerbated the state's financial problems by leaving on the table billions of dollars in potential cuts to school programs that had to be made before the new fiscal year began at midnight.

If lawmakers and the governor do not agree on a plan to wipe out the deficit -- or at least part of it -- by the end of today, State Controller John Chiang will begin giving out IOUs in lieu of checks to pay debts owed by the state.

"We have one more day," Senate President Pro Tem Darrell Steinberg (D-Sacramento) said as his house prepared to convene again.

Democrats in the Legislature will also propose additional cuts today. They are targeting redevelopment agencies. Their plan would raid $1.2 billion of agency funds earmarked for affordable housing. As part of the plan, state requirements that redevelopment projects include such housing would be eased.

Aides to the lawmakers and governor said the shortfall, previously projected at $24.3 billion, increased when Republican state senators blocked a last-ditch effort Tuesday night to slice $3.3 billion, mostly from education.

Those proposed cuts, which were approved by the state Assembly last week on a bipartisan vote, were to have affected the fiscal year that ended on Tuesday. The opportunity to make the reductions expired at the stroke of midnight, after the package failed in a series of party-line votes, with one GOP senator abstaining.

Schwarzenegger had promised to veto the bills unless they were accompanied by a complete plan to balance the budget. Steinberg, saying Republican lawmakers had taken their direction from Schwarzenegger in voting it down, accused all of them of "the most irresponsible act I have seen in my 15 years of public service."

Schwarzenegger said he won't sign any legislation unrelated to the budget until a full budget agreement is reached.

Officials said the failure to make the cuts means the state will now owe several billion dollars more to schools in the coming fiscal year because the state's complex education financing formula is based on the previous year's appropriation.

"It does make the problem bigger -- there's no question about it," Senate Republican leader Dennis Hollingsworth of Murietta said, blaming Democrats for failing to offer a plan that tackles California's full deficit without raising taxes. "We're not interested in partial solutions."

Thousands of state workers, on whom the governor imposed a third unpaid day off every month, were preparing to show up outside the Capitol today to protest, according to the Service Employees International Union, which represents them. The new furloughs would begin on July 10, the administration said.

A state appeals court panel clouded the budget picture further Tuesday with a ruling that could cost the state nearly $3.5 billion. The judges in the 3rd District Court of Appeal said that since 2007, gasoline-tax funds intended for mass transportation had been improperly diverted by the governor and lawmakers to cover other expenses. The state will appeal to the California Supreme Court, said H.D. Palmer, a spokesman for the Department of Finance.

Meanwhile, Chiang, who acts as the state's banker, has scheduled a Thursday morning meeting of a state board that will determine what interest rate the state will pay on the $3 billion a month in IOUs it will begin issuing to contractors and some of California's neediest citizens, including the elderly, the disabled and the poor.

California last issued IOUs in 1992. Doing so again could have serious repercussions. According to Treasurer Bill Lockyer, the decline in the state's credit rating that is likely to follow IOUs -- as it did 17 years ago -- would cost the state $3.4 billion in higher interest rates over 30 years, adjusted for inflation.

Wall Street rating agencies have already warned that they are weighing downgrades to the state's credit, which would probably take years to recover, Lockyer's aides said.

So far, no banks have formally committed to honoring the IOUs, said Chiang's spokeswoman, Hallye Jordan. At least one financial institution, the Golden 1 Credit Union, said Tuesday that it plans to accept the state's IOUs from its 710,000 members, some of whom are state contractors.

The governor and legislators can avert the IOUs if they reach a budget deal before they are issued Thursday. But once they are issued, those who receive them will have to cash them with banks that may accept them or wait until the IOUs come due Oct. 1, Jordan said.