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FINANCIAL CRISIS: INVESTORS, GOVERNMENTS SCRAMBLE

Already, new state budget is in crisis

October 07, 2008|Evan Halper and Michael Rothfeld | Times Staff Writers

SACRAMENTO — The state budget approved only weeks ago is already falling into the red, and lawmakers may be forced to return to Sacramento this month to make emergency spending cuts and take other measures to keep California from running out of cash.

The financial pressures on the state are numerous. Revenue is dropping precipitously as the economy falters. The global credit crunch may make it impossible for officials to obtain billions of dollars in short-term loans that they typically rely on at this time of year.

And a federal judge on Monday put the state on notice that it may need to spend as much as $3.5 billion more on prison healthcare in this fiscal year than lawmakers had planned.

Assembly Speaker Karen Bass (D-Los Angeles) said Monday that an emergency legislative session within weeks is "a big possibility."

She and other leaders will meet Wednesday with Gov. Arnold Schwarzenegger to consider whether to call the Legislature into action.

"The governor is watching the financial condition of the state very closely," administration press secretary Aaron McLear said. "With revenue coming in lower than expected, a special session is something he will discuss with the leaders."

Legislative staffers who are tracking the state's cash flow say that in the month of September, revenue was about $1 billion below the amount projected in the budget that was just enacted. They expect the trend to continue, as the economy shows no sign of recovering.

The administration and state Controller John Chiang will issue official revenue numbers in coming days.

Chiang said the news will be bad. He said California is suffering from soaring unemployment and the evaporation of wealth caused by the stock market's downward spiral. He called on lawmakers to return to Sacramento quickly.

"We need to act immediately," he said.

Finding savings could prove challenging for lawmakers. The Legislature recently wrapped up one of the most contentious budget fights in state history, marked by an impasse that dragged on for a record 85 days.

Democrats insisted throughout the standoff that the state must raise taxes to balance the budget responsibly, and the governor ultimately joined the effort. But GOP lawmakers -- almost all of whom signed an oath never to increase taxes -- said such a move would be disastrous for the state's already struggling economy. The Republican legislators ultimately prevailed.

The budget that passed used billions of dollars in accounting maneuvers to avoid deep cuts in state services. Most financial experts warned that it would quickly fall out of balance. The fight over taxes could erupt anew in an emergency session.

The credit crisis is compounding the state's problems. It remains to be seen whether California will be able to borrow $7 billion it needs this month to stay solvent until the usual flood of sales and income tax receipts arrive in winter and spring. Schwarzenegger notified U.S. Treasury Secretary Henry Paulson last week that if the credit markets do not ease, California may be forced to seek an emergency loan from the federal government.

Meanwhile, a federal judge indicated that he may force the state to spend up to $3.5 billion more than budgeted for prison healthcare. At a San Francisco hearing, U.S. District Judge Thelton Henderson admonished state officials for failing to turn over the money, part of an $8-billion multiyear package that an overseer of the prison health system has demanded to raise care to federal constitutional standards.

J. Clark Kelso, whom Henderson appointed as the receiver in charge of prison medical care, has asked that Schwarzenegger and Chiang be held in contempt of court for refusing his requests for the funds.

He asked the judge to force the state to begin paying.

Henderson appeared to be poised to do so, in an order he will issue this week.

He spoke favorably of Kelso's plan and said the receiver was appointed because of state officials' inability to "stop the dying."

The money Kelso seeks most immediately would go toward seven new facilities for sick and mentally ill inmates. Construction is scheduled to begin in February.

Henderson was clearly unimpressed by arguments that the construction plan may be unnecessary in light of recent improvements the state has made in prison healthcare.

"We are far from finished," the judge said.

State Atty. Gen. Jerry Brown, whose office represented the state in court, called the demand for the prison funds "incredible."

"The state doesn't have enough money to pay its bills right now," Brown said in an interview after the hearing. ". . . If you take this money, you may take it from children, you may take it from the mentally ill, you may take it from the elderly."

Henderson suggested in court that the Schwarzenegger administration, initially supportive of the prison construction plan, backed away from it after it was clear that it was not politically popular.

He chafed at state officials' contention that his previous orders did not obligate the state to pay Kelso and vowed there would be no confusion this time.

"I'm going to write it down very carefully," he said, "so there is no ambiguity about what I'm saying."

--

evan.halper@latimes.com

michael.rothfeld@latimes.com

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