Governor Schwarzenegger Declares 'Fiscal Emergency'

Mike Godfrey, Tax-News.com, Washington

11 January 2008

California Governor Arnold Schwarzenegger on Thursday issued proclamations declaring a 'fiscal emergency,' and called a special session of the state legislature to address California's USD3.3 billion budget deficit. However, the Governor is insistent that the state will not solve its chronic deficits by raising taxes.

Schwarzenegger made his declaration as he submitted his proposed budget for 2008-09, which attempts to addresses the systemic problems that drive California's deficits by imposing strict spending limits by putting in place a Budget Stabilization Act to keep spending under control and create a rainy-day fund to see the state budget through lean times.

According to the Governor, this budget proposal "takes the difficult but necessary steps" that California needs to rein in the state deficit and stabilize the budget without raising taxes.

"We are facing a very tough situation, but with tough times come historic opportunities. I am convinced the legislature will help turn today's temporary problem into a permanent victory for the people of California by joining me to enact true budget reform," Schwarzenegger announced. He continued: "We simply cannot have a budget system where revenues and spending are not tied together. We must rise to the challenge and fix California's budget system once and for all."

Schwarzenegger blames California's fluctuating budget, which has swung in an out of surplus for a generation, on automatic spending programmes which cannot always be covered by volatile tax revenues.

"Automatic spending increases mean that California is locked into spending above its means," a statement from the Governor's office warned, adding that: "As a result, spending in fiscal year 2008-09 will rise by 7.3% unless we take action. Right now, California spends USD400-600 million more each month than the state takes in."

The Governor forecasts that the state faces a projected $14.5 billion deficit by the end of fiscal year 2008-09 unless action is taken to rein in spending.

"If the Budget Stabilization Act had been in place over the past decade, our budgets would be far more manageable, we would not be facing a $14 billion deficit and so much political gridlock could have been avoided," he argued.

The budget proposal includes 10% reductions to nearly all General Fund departments and programs, boards, commissions and elected offices, except in cases where such a reduction is unconstitutional, for example, contributions to public retirement systems. This includes a 10% reduction to the Governor's Office budget and to legislative and judicial branches.

In addition, the proposed budget includes numerous measures to restore California's rainy day reserve and secure adequate cash flow for the state. This includes selling USD3.3 billion in Economic Recovery Bonds by the end of February 2008, and delays in disbursement.

Under the terms of California's Proposition 58, the Governor has the right to call a fiscal emergency if he determines that the state faces substantial revenue shortfalls or expenditure increases. The Governor is then required to call a special session of the legislature and to propose legislation to address the fiscal emergency. However, if the legislature does not approve and send legislation to the Governor to address the fiscal emergency within 45 days, it is prohibited from acting on any other bills or adjourning in joint recess until such legislation is passed.

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