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Downgrades, Layoffs and Strikes Spur Budget Discussion

Downgrades, Layoffs and Strikes Spur Budget Discussion
A week of sparring between Governor Arnold Schwarzenegger and legislative leaders, including a brief boycott of budget negotiations by Assembly Speaker Karen Bass, has brought the State of California to the brink of financial Armageddon. An estimated $35 million is added to the $26.3 billion deficit each day the state fails to balance the budget.   This failure has resulted in Moody’s – a national credit rating agency – downgrading California’s debt rating to Baa1 from A2. This is the third time in recent weeks the state debt rating has been lowered. No state has ever received such a low credit rating – which is slightly above junk bond status. The effect of the downgrade means it will cost additional millions of dollars to retire the state’s massive bond debt. Moody’s also stated that the continued failure to balance the budget “could result in further downgrades.” 
One of the factors cited by Moody’s for the downgrade in debt rating was the uncertainty involving California’s continual issuance of IOUs. California’s use of IOUs to pay vendors and social service providers was necessary to retain cash, so the state would have funds to make constitutionally required bond payments. However, Moody expressed increasing concern that a prolonged budget impasse would also ultimately jeopardize the ability of the state to meet its debt service obligations.
These financial demands and the need to restrict California’s cash outflow has caused Governor Schwarzenegger to include the cut of an additional 2,000 state jobs in recent proposals. These potential job losses are in addition to the 33,000 layoff notices that have already been sent to state employees. Further, in an effort save money the governor has instituted a third furlough day per month, which equals about a 14 percent pay cut for state employees.
State employee unions, who oppose the governor’s mandatory furloughs, believe the additional five percent pay cut resulting from a third furlough day is unacceptable. Governor Schwarzenegger instituted furlough days when California’s voters rejected the tax increases on the May 19 Special Election ballot . Initially, the governor authorized one furlough day, but as budget matters worsened he has incrementally increased the number of days. In opposition to the furloughs, the Service Employees International Union executive council has decided to request authorization from its members to call a strike.
However, the severity of the budget impasse, the banks’ refusal to honor state-issued IOUs, and the downgrading of the state’s credit rating appears to finally be forcing Governor Schwarzenegger and legislative leaders to act. This week the leaders have met extensively, hopeful that an agreement could be reached by week’s end. In spite of weeks of derisive acrimony and special interest media campaigns, legislative leaders have expressed optimism that a resolution is near. However, as talks broke down Wednesday night over education funding, hope may be fleeting.
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