S&P forces Democrats to balance budget

June 13, 2012

By Katy Grimes

This morning Assembly Speaker John Perez, D-Los Angeles, and Senate President Pro Tem Darrell Steinberg, D-Sacramento, anounced big solutions for the state’s budget problems. They said the Senate and Assembly budget proposals, due on Friday, will close the deficit this year, erase $200 billion in debt, create a structural balanced budget and provide the state with $2 billion in reserves by the 2015-16 budget year.

Steinberg and Perez told reporters that, because they stand for the middle class and the poor, they’ve made tough choices, and it’s time that California ended its chronic budget problems.

And they are going to perform all of this budget magic without any additional borrowing.

Miracle of all miracles–California will be in the black by the end of the 2011-12 budget year, which ends on June 30, apparently just because it’s the right thing to do.

Ahem…not so fast.

After years of record deficit spending, why did Steinberg and Perez pick now to pass a balanced budget? Why would the state start disciplining itself now?

I always look at motive when I am seeking answers.

The answer

Standard & Poor’s is threatening to downgrade California’s outlook if lawmakers don’t balance the budget without gimmicks. “We are  being disciplined by our lenders who will downgrade us for fudging,” said Assemblywoman Diane Harkey, R-Dana Point.

Bad old  Wall Street bankers are forcing California to clean up its financial mess in order to prevent a catastrophic economic tsunami.

California’s economy is nearly one-eighth of the entire country’s gross domestic product. It totals 30 percent of the debt carried by all 50 states, according to Gabriel Petek, an S&P analyst. Petek, interviewed by FOX Business, said that California is overly reliant  on personal income taxes, and that the state’s tax structure is behind the deficit because of this reliance.

In 2009, the Legislature voted to allow the state to pay up to 12 percent on short-term variable borrowing,  instead of the 5 percent the state had been paying.

“This is junk bond debt,” said Harkey, who fought against the debt authoriztion bill, SB 116, by state Sen. Ron Calderon, D-Montebello.

California needs a $1.8 billion cash flow in short term borrowing this July, but S&P is requiring the money to be repaid by the end of the budget year.

Steinberg and Perez said that they don’t want to fight with Brown, but are prepared to. They plan to bring a vote on the budget Friday.

“You don’t need to cut deeper when you have a structural balance in one to two years,” Steinberg said. “Cuts are a necessity, but not a virtue.”