SAN FRANCISCO |
SAN FRANCISCO (Reuters) - A day of reckoning is coming for California's perpetually wobbly finances in the form of another lean budget plan next week, says Governor Jerry Brown -- and analysts expect moments of political hysteria along the way will create opportunities to buy the state's debt.
Whether lawmakers will back Brown's plan is uncertain. Democrats control the legislature and he is one of the state's most famous Democrats, but that does not guarantee the legislative and executive branches will agree on how to plug a budget gap that may near $28 billion through mid-2012.
Sara Craven, a senior portfolio manager at Sand Hill Global Advisors Llc in Palo Alto, California, expects Brown to wrangle with lawmakers over the budget, fueling needless worries and more overheated talk of a financial collapse in store for California, the biggest issuer of U.S. municipal debt.
"It will take considerable time to produce a balanced budget, and that creates headline volatility," Craven said.
Bud Byrnes of RH Investment Corp in Encino, California, sees market jitters rising from any budget fracas as opportunities to buy California general obligation debt, or GOs, because paying it off is a top priority required by the state Constitution.
State Treasurer Bill Lockyer has been driving that guarantee home to investors, helping him sell $10.5 billion of municipal bonds last year, the most of any U.S. state, according to Thomson Reuters data.
"The pros are already stepping in," Byrnes said. "I know some asset managers who are specifically buying Cal GOs and nothing else within the state because Cal GOs have been too beat up by politics and negative press."
TOUGH BUDGET FOR TOUGH TIMES
Brown may already be making Democrats as nervous as former Republican Governor Arnold Schwarzenegger did by signaling he will pick up his predecessor's budget ax. Democrats had bitterly contested Schwarzenegger's spending cut plans.
Brown, 72, took the oath of office as governor of the most populous U.S. state on Monday, telling his inaugural audience he had not returned to the state capital of Sacramento to "embrace delay or denial" over California's financial straits as so many state leaders had in recent years.
"The guy sounds more Republican than Schwarzenegger at this point," said Herb Morgan, president of money management firm Efficient Market Advisors Llc in Del Mar, California.
California's dramatic fiscal woes of recent years -- its general fund budget is down over the past three years by more than 15 percent to $86.6 billion -- have caused Moody's Investor Service to give its lowest state general obligation credit rating of A1, a distinction it shares with Illinois. Brown has been blunt about the state's financial options.
"Choices have to be made and difficult decisions taken," he said at his inaugural.
"The budget I present next week will be painful, but it will be an honest budget," he added. "The plan represents my best understanding of our real dilemmas and possibilities. It is a tough budget for tough times."
Because Democrats balked at budget plans based on cuts by Schwarzenegger, Brown has also signaled additional revenue could be raised by extending temporary tax increases. Analysts expect that when Brown, a two-term governor in the 1970s and 1980s, unveils his budget plan next week he will also urge a special election to at least extend temporary tax increases.
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