January 11, 2011 1:05 am

California faces budget cuts of $12bn

Jerry Brown, the new governor of California, released his first budget for America’s most populous state on Monday and immediately waded into controversy. He plans to cut $12bn from public spending, with higher education and welfare services among the areas in line to suffer.

California has a budget deficit of more than $25bn (£16bn), which Mr Brown, a Democrat, said could only be closed by a “vast and historic realignment of government services”.

The state’s finances have floundered thanks to years of economic mismanagement and the imposition of costly ballot measures – voted for by the public – for which California has struggled to pay.

Its lauded university system, which was given a public mandate by Mr Brown’s father, Pat Brown, when he was governor in the 1960s, faces cuts of 20 per cent. The University of California system, with its campuses in Los Angeles, Berkeley and San Diego, faces a cut in its annual budget of $500m.

“These cuts will be painful, requiring sacrifice from every sector of the state, but we have no choice,” Mr Brown said. “For 10 years we’ve had budget gimmicks and tricks that pushed us deep into debt. We must now return California to fiscal responsibility and get our state on the road to economic recovery and job growth.”

Services for the developmentally disabled will be slashed by $750m, according to the governor’s plans, while the poorest in society and those most in need of the state’s help will face further pressure with $1.5bn to be removed from welfare spending. More than 2.2m people in California are looking for work – an unemployment rate of 12 per cent, which is more than two points above the national average.

Mr Brown faces a struggle to get his budget passed. His extension of taxes by five years requires the approval of the state’s voters, one of the pledges of his election campaign when he defeated Meg Whitman to replace Arnold Schwarzenegger as governor.

Republicans were critical of the plans to extend tax increases, with most Republicans in the California government pledging not to support any tax rises.

Ron Nehring, chair of the California Republican party, told the Financial Times that Mr Brown’s budget was “entirely inadequate”.

“It proposes a large tax increase on a state that is already suffering one of the most crushing tax environments in the country.” The budget, he added, was “short on fundamental reforms which are needed to tackle the long-term cost drivers” of the state’s finances.

Two-thirds of the state’s representatives need to support the measure’s inclusion on a public ballot before the proposal can be put to voters.

“If somebody has better ideas, I’d like to hear about them,” said Mr Brown. “We’ve made some drastic cuts and to do more is going to impair the quality of public service.”

His plans were given a cautious welcome by business groups. “We appreciate Governor Brown’s frank assessment of the situation California faces,” said Allan Zaremberg, chief executive of the California Chamber of Commerce.

Mr Brown’s budget also has repercussions for bond markets. Under his proposal, California will not sell general obligation bonds until autumn 2011, which would be the first time since 1988 that the state has not sold such bonds in the spring.

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