LOS ANGELES - California lawmakers and Gov. Pete Wilson reached a budget accord early Wednesday morning, breaking the state's longest budget stalemate and allowing the sale today of an interim note issue of about $3.3 billion.
Gov. Wilson signed the $57.5 billion budget package, which includes $40.8 billion of projected general fund spending in fiscal 1993, after the Legislature approved a compromise spending plan for education and other budget-related bills designed to bridge the state's $10.7 billion gap.
The end of the 64-day deadlock gives California authority to start paying its bills with cash instead of registered warrants and paves the way for the interim financing, which will help redeem some of the IOUs.
The issuance of interim notes, carrying five-week maturities, will tide California over until the state prices its estimated $5 billion revenue anticipation note sale later this month.
Hal Geiogue, assistant state treasurer, said the interim financing will be sold about an hour after the market opens today, adding that the issue is likely to be redeemed Oct. 8 when the Ran issue closes. Lehman Brothers is running the books on the interim borrowing and the Ran issue, Mr. Geiogue said.
Kathleen Brown, the state treasurer. said in a statement yesterday that she expects the interim borrowing to achieve interest rates as low as 3.5%, or possibly less, depending on investor demand. By contrast. California has paid 5% on the IOUS.
Gov. Wilson, a Republican, and the Democrat-controlled Legislature reached the budget agreement after weeks of disagreement that centered on the appropriate funding levels for schools. Lawmakers decided to compromise by cutting school funding by $899 million this year and loaning schools $862 million from future budgets to maintain current school spending at last year's level of $4,185 per student.
Democrats also agreed on a provision allowing the suspension of Proposition 98, a voter-approved measure requiring that a certain percentage of state funds go to schools, after the governor promised that spending per student would not drop from current levels for two years.
In another school-related development, the Legislature in recent days approved ACA 6, a proposed constitutional amendment that would allow, approval of local school general obligation bond measures with a simple-majority vote rather than the current two-thirds requirement.
The proposal, which would appear on the statewide, ballot in June 1994, marks a breakthrough of sorts because state officials have repeatedly' rejected similar measures in recent years. Gov. Wilson previously expressed support for lowering the approval threshold for such bonds.
The new state budget also will affect local governments throughout California because it shifts $1.3 billion of property taxes to the state from counties, cities, and special districts.
It was unclear yesterday how those cuts might affect local agencies and their bond issues, but all levels of government are likely to feel the budget sting.
Steven G. Zimmermann, a managing director of Standard & Poor's Corp., said his firm will be "looking to see where there could be some credit deterioration" at the local level. Counties are absorbing the largest blow in terms of dollar amounts, he said, and one question on a case-by-case basis is whether "they can reduce their service levels to offset these cuts."
Moody's Investors Service said the state cuts "do not bode well for local government credits in California," but the agency said it needs to examine issuers on a case-by-case basis. No "across-the-board actions [are] currently envisioned," Moody's added.
Under the provisions of SB 844 and SB 617, two local government trailer bills passed by the Legislature yesterday, counties will realize overall cuts of $525 million; cities, $200 million: redevelopment agencies, 200 million: and special districts. $375 million.
According to a lobbyist, the provisions of SB 844, which modifies SB 617. include a complex formula to cut property taxes for special districts. The lobbyist and a rating agency analyst noted that the district cutbacks are capped; special district property taxes could be cut up to 40%, they noted, but the reductions cannot exceed 10% of a district's total revenues.
The special district provision includes exceptions for some hospitals. city districts, and multicounty districts, the lobbyist said.
Market participants also were studying how the cuts to redevelopment would be structured and whether outstanding bond issues would be affected.
"The last-minute shifts [in budget negotiations] have made it necessary to re-evaluate the situation," said Lawrence J. Arceneaux, president of Katz Hollis, a financial advisory firm. "The first concern is whether or not there is protection for outstanding debt and debt about to be sold."
William Carlson, executive director of the California Redevelopment Association, said the cutback is "fairly severe, but at this point we're grateful it's only one year" for redevelopment agencies.
Mr. Carlson said the cutbacks translate to a 15% reduction in state payments for each redevelopment agency. He added that cities will be required to help redevelopment agencies in cases where the cuts cause a hardships, although cities could require repayment under reimbursement agreements reached with the agencies.
He stressed that "the agencies' bonds will be protected and their contracts will be honored."
The budget also includes cuts of about $1.7 billion from health and welfare services.
California's economic problems and the lengthy budget debacle already prompted rating agency downgrades. The state's GOs are rated Aa by Moody's, A-plus by Standard & Poor's, and Aa-plus by Fitch Investors Service.
Ms. Brown said she plans to meet with agency officials this month to describe the new budget. She also will hold investor meetings soon to explain her plans for marketing $1.3 billion of GO bonds, tentatively set for sale in mid-October.
