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Amid Dire Warnings, State Again Misses Budget Deadline • Counties, cities, school districts and other agencies are being forced to pass their own budgets without knowing whether the state will cut back on its payments to them later. For some, a short impasse would be manageable, but the implications could grow dire by late summer, when they will be well into the budget year. • Wall Street analysts warn that California's credit rating, already the lowest of any state in the nation, could fall again because of uncertainty about when legislators may act to correct the state's deeply troubled finances. The threat of a recall campaign against Gov. Davis is adding to the insecurity among financial experts, who worry that the recall is hardening positions on both sides of the budget debate, making compromise more difficult. • Failure to close the budget gap has led to extensive borrowing, driving up the amount the state must spend on interest and fees just to stay afloat financially. Delays only deepen that difficulty, which grows more dire by the week. At the present rate of spending, California could be out of cash by Labor Day. "The state's financial situation is very poor and it is deteriorating," state Controller Steve Westly said last week. "The problem gets worse each day we go without a budget." "It's a tragic place to be," added state Finance Director Steve Peace. "Real people are going to be affected." Last summer, it took a record 67 days for the Legislature to pass and the governor to sign a budget for the fiscal year that ended Monday. Despite the length of that budget impasse, the state was able to pay many of its obligations. But in early May, the state Supreme Court changed the ground rules governing who gets paid and who doesn't in the absence of a budget. The court, in a unanimous decision, agreed with attorneys for the Howard Jarvis Taxpayers Assn. that there are limits to what the controller can pay without the specific spending authority contained in a budget bill or the state Constitution. "Our target [in filing the lawsuit was] the policies of the state of California which reflect massive overspending," said Jon Coupal, president of the taxpayers association. "It is regrettable there is going to be a lot of collateral damage." Westly said the Jarvis decision means he cannot pay community colleges, child development programs, highway expenditures, Cal-Grant scholarships, and non-payroll expenses for the Cal State and UC systems. The controller said he will follow tradition and not pay constitutional officers, state legislators and legislative staff until a budget is adopted. The Jarvis decision allows the state to make certain payments to schools for debt service and mandated federal programs, such as welfare and Medi-Cal health insurance for the poor. But California's public schools could feel the pinch by the end of this month. That's when the state would withhold about $200 million in so-called categorical funds that pay for special education, transportation, textbooks and other items. With no spending plan in place, the state would hold on to an additional $500 million in August and about $440 million in September.
School districts said they could weather the losses initially because most of their funding comes from a continuous stream of state general fund money. But a prolonged loss of the categorical funds might force
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