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Schwarzenegger orders 10% cuts in state budget

Posted by ecoshift on November 6, 2007

Schwarzenegger orders plan for 10% budget cuts – Los Angeles Times
By Evan Halper, Los Angeles Times Staff Writer
November 6, 2007

SACRAMENTO — — Gov. Arnold Schwarzenegger on Monday ordered all state departments to draft plans for deep spending cuts after receiving word that California’s budget is plunging further into the red — largely because of the troubled housing market.

State officials have warned the governor that the likely deficit for next year has jumped from a few billion dollars to as much as $10 billion, threatening to wipe out the progress Schwarzenegger has claimed in getting the state’s accounts in order.

In response, Schwarzenegger’s finance department has ordered agency directors to formulate plans to cut budgets by 10% for the spending blueprint the governor will unveil in January, according to administration officials who spoke on condition of anonymity. That would mean substantial cuts in all state programs, including education, transportation and healthcare, the officials said.

The news is a major setback for the governor’s other policy initiatives. His proposals to pass legislation this year that would bring healthcare to all Californians and address the state’s water problems were already faltering in the Legislature. News of a massive looming deficit will make the proposals, both of which would require billions of dollars of new spending, politically less palatable to lawmakers.

The state’s mounting financial problems will also make California less attractive to Wall Street, which could downgrade its credit rating.

Economists say the state’s declining fortunes are due in large part to the shakeout in the housing market and a volatile revenue system overly reliant on income taxes. As state officials discovered last time the economy went into decline, any downward shift leaves California’s general fund reeling.

Administration spokesman Adam Mendelsohn declined to answer questions about the directive issued Monday. He would say only that internal budget discussions were continuing.

“Whatever we are doing now is all part of the deliberative process internally to make sure we are best prepared for whatever situation presents itself,” he said. “We are continuing to look at revenues as they come in.”

Economists warn that the administration should prepare for more bad news.

“We are among a handful of states that has a lot of exposure to the housing crash,” said Ted Gibson, a former state economist. Property taxes, income taxes and sales taxes are all off as a result.

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