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Clock's ticking for California budget talks

As a deal stalled over school funding cuts, warnings sounded about rising state debt and falling bond ratings.

By Michael B. FarrellStaff writer / July 17, 2009

Gov. Arnold Schwarzenegger, speaking to reporters outside his office in Sacramento, Calif., Thursday, was optimistic that disputes over education funding would not stall a budget deal for long.

Rich Pedroncelli/AP

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San Francisco

California lawmakers pushed back the start of summer recess Friday as they battle to end an epic budget stalemate that’s exacerbating a financial crisis and adding to calls for political reform.

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If a deal isn’t reached soon, California’s bond rating could sink to junk status, warned state treasurer Bill Lockyer Thursday.

Legislators and Gov. Arnold Schwarzenegger seemed close to inking a deal earlier this week to close a $26.3 billion budget shortfall, but talks broke down Wednesday over cuts to educational spending.

“The good news is that they are on the last mile of the marathon. But even though they are close to the finish line, both sides have plenty of incentive to maintain their positions,” says Dan Schnur, executive director of the Jesse M. Unruh Institute of Politics at the University of Southern California.

The latest standoff revolves around school spending cuts. Democrats want to amend Proposition 98 – a mandate setting aside 40 percent of its general fund to schools – to say that anytime the state can’t meet that funding level, it will pay schools supplemental funding (in this case $9.5 billion) in the coming years. The governor is reportedly on board with helping school recoup lost funding, but opposes any permanent change to the proposition as unconstitutional.

But with each passing day, the state racks up debt by issuing IOUs to cover its bills, says economist Stephen Levy. He notes that the lowered bond rating – currently just two notches above junk – is hurting the state's short- and long-term interests.

“We are looking like the state that can’t get its act together and that’s not good when you are trying to attract businesses,” says Mr. Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto. “It’s all part of a picture of widespread economic damage, and the damage to the reputation [of California].”

Meanwhile, new jobs data showed that while the overall unemployment rate of 11.6 percent was unchanged from May to June, California still lost an estimated 66,500 jobs last month.

Despite the gloomy scenario, an analysis by investment firm Charles Schwab says that California is unlikely to default on its bonds.

“Unlike a corporation, states are sovereign entities, and cannot simply shut down and disappear, leaving all obligations and commitments behind,” said analyst Rob Williams in a report on the state’s economy.

Still, the prolonged impasse – and the realization that the budget will result in service cuts across the board – has increased frustration with California’s political process.

“The only way you are going to resolve this for good is to have some structural reform in how the state is managed,” says Robert Cruickshank from Courage Campaign, a progressive group pushing for a constitutional convention in California. The group is holding a series of town halls this weekend on how to overhaul the state’s governmental system.

But while there is support now for constitutional and other state reforms because of the budget crisis, says USC’s Mr. Schnur, translating that into real change later is another matter entirely.