updated 7/27/2009 9:04:01 PM ET 2009-07-28T01:04:01

A bond analyst was skeptical Monday about California's revised budget, saying it was filled with accounting tricks that would do little to improve the state's poor credit rating.

In addition, lenders may not be satisfied with California's latest spending plan, which combines $15 billion in cuts to education, prisons, parks and other aspects of state government with accounting maneuvers and borrowing to close a $26 billion deficit.

The state already has the lowest credit rating in the nation, except for the commonwealth of Puerto Rico, said Matt Fabian, a bond analyst at Municipal Market Advisors, based in Concord, Mass.

"The budget is probably the best they could do given this time. but nobody believes it is a balanced budget," Fabian said.

Schwarzenegger is expected to sign California's revised $88 billion budget Tuesday and then brief the state treasurer and controller, creditors and analysts on how the latest spending plan will impact day-to-day cash flow.

The governor and lawmakers are hoping their latest plan provides the assurance lenders need for the state to take out loans and stop issuing IOUs to thousands of vendors.

The state treasurer's office indicated Monday it was waiting for a financial update from the Schwarzenegger administration to assess the state's borrowing needs. The controller has said he will take up to two weeks to decide whether it the state can stop issuing IOUs.

Short on cash
California has come to rely on taking out billions of dollars in short-term loans from commercial lenders to cover payments in the first half of each fiscal year until tax revenue comes in the spring.

This year, the state ran into a cash shortage, forcing Sacramento to issue IOUs instead of checks and prompting the state's downgraded credit rating, which Fitch Ratings placed at BBB. Most states have a AAA or AA rating.

Even as lawmakers passed the plan last week, they warned that deeper cuts might still be necessary amid an accelerating slide in tax revenue.

Fabian agreed, saying the plan largely pushed the state's problems into the future.

"You have accounting tricks like moving employee salaries out a day, deferral of school aid and withholding acceleration increases by 10 percent," he said of some of the tactics. "All of these are just borrowing money out of the future."

Acceleration increases involve raising income tax collections by increasing withholding by 10 percent. Taxpayers will get to reclaim the money during tax season. The strategy amounts to an interest-free loan for the state.

Schwarzenegger is expected to use his line-item veto power to make additional cuts before signing the spending plan. Some of those cuts could target welfare and social service programs.

Last week the Assembly rejected two controversial measures that would have brought another $1.1 billion to the state. One would have taken transportation funding from local governments, while the other authorized additional oil drilling off the Santa Barbara coast.

The governor's spokesman, Aaron McLear, said Schwarzenegger was not expected to cut the full $1.1 billion when he signs the budget. But he said additional cuts were necessary to provide a cash cushion for the state in case of emergencies such as earthquakes and wild fires.

"We will always be in a position to aggressively respond to disasters," McLear said.

McLear declined to specify where the governor will cut, except to say he was reviewing his options.

Social services on chopping block?
With much of state spending mandated by federal and constitutional requirements, social service advocates fear Schwarzenegger could go after money counties receive to administer social service benefits.

Likely targets include CalWORKS and Medi-Cal, which respectively provide welfare-to-work assistance and health insurance for poor families.

Counties are also at risk of losing funding to provide foster care and in-home supportive services for seniors and the disabled.

"I'm really worried he's going to make harsher cuts to county administrative services," said Mike Herald, a lobbyist for the Western Center on Law and Poverty, a Los Angeles-based advocacy group for the poor.

Advocates view the move as a double-punch since the Schwarzenegger administration has been reducing direct benefits in a time of an unprecedented revenue drop.

California's economy has been hit by the housing market slump and high unemployment, and the latest deficit-closing efforts come just five months after lawmakers and the governor ended months of negotiations to close a previous $42 billion deficit.

Under the latest budget approved by the Legislature, the state will impose tougher sanctions on CalWORKS recipients who don't meet work requirements. California also lowered Medi-Cal reimbursement rates for health care providers and eliminated optional benefits such as dental and eye care for adult recipients in previous rounds of budget cuts.

"Given the skyrocketing demand for vital human services caused by the recession, I can't imagine that the governor would cut any more from the most vulnerable people in the state," said Frank Mecca, executive director of the County Welfare Directors Association of California.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Discuss:

Discussion comments

,

Most active discussions

  1. votes comments
  2. votes comments
  3. votes comments
  4. votes comments