IOUs, proposed cuts to education after budget deal fails

Timm Herdt

Jul. 2, 2009 (McClatchy-Tribune Regional News delivered by Newstex) -- SACRAMENTO -- Trying to put the best spin on a botched standoff that saw state officials late Tuesday night squander a one-time chance to cut $3 billion from California's budget shortfall, Gov. Arnold Schwarzenegger said Wednesday that at least schools were spared from having to absorb the loss of funds.

"The kids are going to get their money back," he said. "The kids and the education community are smiling today."

Had there in fact been any such euphoria, it was short-lived. To make up for Tuesday's lost opportunity, Schwarzenegger unveiled a new list of budget cuts that for the first time proposes suspending the schools' Proposition 98 funding guarantee in the 2009-10 budget year, a proposal that would result in $1.4 billion in school spending reductions beyond what had already been suggested.

"There's certainly no glee in education today," said state Superintendent of Public Instruction Jack O'Connell. "Suspension is not just a slippery slope, it's a slippery cliff."

O'Connell noted that schools are already operating with $12 billion less than originally anticipated.

The new spending reductions, which also reflect a third day per month of unpaid furloughs for state workers that Schwarzenegger ordered Wednesday, are necessary because the failure to reach agreement Tuesday night resulted in the size of the state's budget shortfall ballooning from $24.3 billion to $26.3 billion.

Fiscal experts had said the shortfall would grow by more than $3 billion, but Finance Director Mike Genest said $1.4 billion in 2008-09 cuts to higher education can still be realized because the University of California and California State University do not have to close their accounting books until Aug. 1. He said officials from the two university systems have assured him the money will not be spent or encumbered before then.

The failure to agree on the spending cuts Tuesday night also means that Controller John Chiang plans to begin printing IOUs today after the state's Pooled Money Investment Board sets what the interest rate on them will be. The interest-bearing IOUs will be used instead of cash to pay a variety of the state's bills, including payments to counties, businesses that contract with the state to provide goods and services, and individuals who receive financial assistance from the state.

Schwarzenegger and legislators spent part of their day Wednesday making preparations for the IOUs. Both houses of the Legislature passed a bill that would allow the IOUs to be redeemed without interest penalties earlier than their Oct. 1 maturity date and Schwarzenegger talked by phone with executives at major banks, urging them to honor the IOUs.

"We want to let them know that California has never defaulted," Schwarzenegger said. "We will make those payments. We will be responsible."

As they dealt with the fallout from Tuesday's night standoff, lawmakers and the governor tried to sort out questions of where to go from here.

The consensus is that a huge challenge has now become more difficult.

"Was it a setback? Of course it was," said Tony Strickland, R-Moorpark, said. "I personally didn't think it was helpful to go through those drills."

Although the Senate remained in session until midnight, there was never a realistic expectation in the final hours that the three bills needed to make the cuts would pass. All failed on 25-14 votes, two short of the required two-thirds majority, because Republican senators stood firm with Schwarzenegger in his insistence that he would accept nothing less than a full solution to the entire budget shortfall.

"I agree with the governor that we can't piecemeal this," Strickland said.

He said he believes the next step is for Schwarzenegger and the leaders of both parties in the Legislature to begin intense private negotiations. "Both sides and the governor have to sit down and iron this out," he said. "No one benefits from IOUs and no one benefits from a standoff."

Sen. Fran Pavley, D-Agoura Hills, said she fears the governor's new proposal to suspend Proposition 98 will complicate an already difficult situation.

"No one wants to cut education further," she said. "Everyone realizes it's the No. 1 priority in every district. The suspension of Proposition 98 creates a whole new dynamic. Even the Republicans who say they want to cut, cut, cut aren't going to vote for that."

Pavley said legislative Democrats are prepared to enact many of the policy modifications sought by Schwarzenegger, including consolidation of regulatory agencies by eliminating some boards and commissions, adoption of new rules to combat abuses in social services programs and other steps.

"We understand the consequences of the national and worldwide recession," she said. "We simply don't have the money."

Newstex ID: KRTB-0210-36174121