TOPICS > Economy

Calif. Strikes Deal to Close $26 Billion Budget Gap

July 21, 2009 at 6:45 PM EDT
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Lawmakers in California on Tuesday agreed on a plan to close a $26 billion budget gap, ending weeks of stalemate that left the state's chief accountant having to issue IOUs to creditors. Ray Suarez reports.

JIM LEHRER: Finally tonight, a closer look at the budget deal in California. Ray Suarez has that story.

RAY SUAREZ: It’s been almost three weeks since California’s budget crisis reached the tipping point. That’s when the state started paying contractors and vendors in IOUs because of a $26 billion shortfall.

Last night, lawmakers and the governor finally reached a deal, and a painful one at that. It includes billions of dollars in cuts to state services and borrowing money from local governments.

NewsHour correspondent Spencer Michels has been covering this story, and he joins us from San Francisco.

Spencer, last night when the governor made his announcement of a deal with top state legislatures, he said, “We dealt with the entire $26 billion deficit.” Did he? And if he did, how?

SPENCER MICHELS: Well, first of all, the deficit was actually much more than that. It was about $60 billion, but it’s been whittled down through cuts over the past several months.

He did deal with it. The legislature dealt with it, but they dealt with it the old-fashioned way. They made deals. They made some cuts, a lot of big cuts. They did not put any new taxes into play. But they made a bunch of little deals that transferred money from here to there, and they came up with what they say is a balanced budget.

RAY SUAREZ: Since this crisis first began, they’ve paid state contractors and some taxpayers with more than 150,000 IOUs, the state, in effect, taking on to itself hundreds of millions of dollars in future obligations. Were those part of the deal? Are those going to be paid off now?

SPENCER MICHELS: Well, eventually, they’ll be paid off. They’re supposed to be paid off starting October 2nd, but that could change. It depends. The state controller — I talked to the state controller’s office today, and they said it depends on what this big budget deal comes up with.

If it really does make enough money for the state and the cuts make the expenses less, then they will be able to redeem the IOUs, but they’re not sure that’s going to happen and they’re going to have to have a big process where they decide how much money the state has and if it can pay off the IOUs.

Big cuts to cities and counties

RAY SUAREZ: In the meanwhile, which Californians are going to be feeling the effect of those cuts?

SPENCER MICHELS: Well, I think most Californians are going to be feeling them. The poor, of course, always get hurt with these things. There's a big cut to welfare. And the people in welfare agencies are very upset by this; they think that it's a terrible thing, that they had tried to get people on the work rolls and those people are now going to have a hard time staying on the rolls, getting any welfare.

People who are yelling perhaps the loudest are the cities and the counties, because California, the state, intends to borrow money from the cities and the counties and take some of the money away from them. And they claim they're not going to be able to fill the potholes in cities and counties around California, so they are threatening to sue the state and they say they actually will.

They've also taken money away from redevelopment projects. And that, they say, is going to hurt the construction industry, because these redevelopment projects were, you know, involved in construction and changing cities, and so that's all going to come to a halt, so they're very concerned about that.

Education is, of course, another big hit area. And there's going to be a lot of money chopped from education. School classes are going to be larger. There are going to be teacher layoffs. There already have been. Summer schools have already been cut.

So education K-12 and community colleges is hurt, and then some of the University of California and the state college system, the state university system, those big, big problems there. The University of California complaining that its reputation as one of the top public universities in the country is in jeopardy because of the big cuts that they've had to make.

Deal pending in the legislature

RAY SUAREZ: Doesn't this deal still have to pass the legislature?

SPENCER MICHELS: It does. And there's all sorts of wrangling going on right now. In fact, it's not even sure that it's going to pass the legislature.

The vote is scheduled for Thursday, but there's all sorts of lobbying going on, various groups trying to contact their legislators. And the legislators holding caucuses today, where the leadership, which made this deal with Governor Schwarzenegger, is trying to sell it to the members of their caucuses. And it's not sure -- there's one major state writer who's predicting that it might not pass.

RAY SUAREZ: Well, roughly 1 out of 8 eight Americans lives in California, so it certainly affects a lot of people. But what about the tens of millions of Americans who don't live in California? Does the state's fiscal crisis have a downstream effect for everybody else?

SPENCER MICHELS: Well, the state's fiscal crisis is more than just a state crisis. It's a whole economic crisis.

And California's economy is the eighth-largest economy in the world and certainly the largest in the United States. And so if California has a problem -- and it seems to be having a big problem -- it affects everybody else.

In addition to that, the bonds that California has are rated about junk level at this point and maybe even going below that, so that isn't good. That affects the entire bond market.

But the other general idea is that, as California goes, so goes the rest of the nation. Whether that's true or not, I'm not sure. But in this case, California could show the rest of the nation what's going on, and it isn't good at this point, and so California's problems could have an effect throughout the country.

RAY SUAREZ: Now, Spencer Michels joining us from San Francisco, good to talk to you.

SPENCER MICHELS: Nice to talk to you, Ray.