Budget pact would close $19 billion California deficit with spending cuts, rosy projections

Details emerge on no-tax California budget pact

SACRAMENTO, Calif. — After a record-long impasse, California legislators are set to vote this week on a no-new-taxes budget that relies on a combination of spending cuts and optimistic financial projections to close a $19 billion deficit.

Details of the agreement between Gov. Arnold Schwarzenegger and legislative leaders began emerging Saturday ahead of a vote by rank-and-file lawmakers planned for Thursday. If approved, it would end a budget stalemate that has already stretched for 94 days.

The state would cut about $7.5 billion in spending as part of the deal, down from the $12 billion Schwarzenegger proposed earlier this year.

To make up the shortfall, the agreement counts on an improving economy and the federal government to provide more money than previously projected.

Senate President Pro Tem Darrell Steinberg, D-Sacramento, said last week that the leaders turned to some “creative” bookkeeping after Republicans refused to raise taxes and Democrats rejected deeper budget cuts.

The pact he and the others reached Friday night assumes about $5 billion will come from the federal government, up from the $3.4 billion the governor had projected, said multiple sources close to the negotiations. It uses the Legislative Analyst’s Office optimistic forecast of an additional $1.4 billion flowing to the state from higher-than-projected revenues. And it counts on as much as $1.2 billion from selling 11 state properties, then leasing them back.

Legislative and administrative aides said they could not speak for attribution until details of the budget are formally released ahead of committee hearings scheduled for Wednesday, but they agreed on all the major points.

The leaders had been under increasing pressure to pass a budget this week. Controller John Chiang has said he might have to issue IOUs for just the third time since the Great Depression if the week passed with no budget. Treasurer Bill Lockyer warned an estimated $7 billion in planned public works projects could be in danger if a deal was not reached soon.

This is the longest the state has ever gone beyond the July 1 start of its fiscal year without a budget. Legislative leaders have been struggling for ways to bridge a $19 billion gap, which represents more than 22 percent of the state’s $84.5 billion budget last year.

To help get there, Republicans agreed to a two-year delay of a corporate tax break that had been set to take effect Jan. 1, saving the state $1.4 billion this fiscal year. In return, they won permanent concessions to close what they described as loopholes in an earlier business incentive law.

The changes won by Republicans affect the way companies calculate taxes on things like cable television and computer software, which Democrats complained would benefit corporate giants like Comcast Corp. and Microsoft Corp.

But Democrats said they narrowed the tax breaks to cut the cost to the state from $500 million to about $140 million this year. Republicans said the cost will be much less, as low as $41 million.

Republican support is critical because Democrats are several votes short of the two-thirds majority they need to pass a budget and tax increases on their own. Senate Minority Leader Dennis Hollingsworth, R-Murrieta, said Friday that he expects enough support among Republicans to pass the budget.

Republicans also avoided proposed taxes on oil production and on property owners’ insurance to pay for firefighting services, and rejected Steinberg’s proposal to rebalance the way the state levies income, sales and vehicle taxes. They also blocked a proposal to divert more state prison inmates to local county jails to save the state money.

Democrats said they were able to minimize cuts to schools, child care, welfare and other social programs, without giving details even to rank-and-file lawmakers who were briefed during conference calls Friday and Saturday.

Assembly Speaker John Perez, D-Los Angeles, said the proposal protects California jobs, avoids new taxes and shields schools from massive cuts.

“This budget honors all three of those core commitments,” Perez said in a statement Saturday. He called the outcome “a solid — but sober — deal for California.”

However, there is no guarantee all Democrats will support the agreement, setting up the usual last-minute horse-trading for votes.

Sen. Leland Yee, D-San Francisco, wouldn’t support Democratic leaders’ budget proposal during an Aug. 30 test vote, and is unlikely to vote for an even harsher compromise, said spokesman Adam Keigwin.

“He’s not going to support a budget that severely cuts education, social services and health care. His position is we’ve cut enough in those areas, people are struggling in those areas,” Keigwin said.

Both sides claimed victory on one of the biggest sticking points: pension reform.

Democrats expect the Republican governor to complete negotiations within days to win pension concessions from Service Employees International Union Local 1000.

The 95,000-member local represents nine of the 15 state bargaining units that lack a contract. If it agrees to benefit rollbacks, Democrats expect the remaining bargaining units to go along.

Once they do, Democrats could meet Schwarzenegger’s demand that they repeal an 11-year-old law that authorized increases in public employee benefits.

“We came to an agreement on pension reform with the Legislature,” Schwarzenegger press secretary Aaron McLear said Saturday, without giving details. “He’s said since January that he won’t sign a budget that doesn’t include comprehensive pension reform. That remains the case.”

Schwarzenegger had also demanded the state create a “rainy day fund.” The leaders agreed to ask voters to reconsider creating such a fund on the 2012 ballot. Last year, voters rejected a proposal to build a reserve equal to 12.5 percent of revenue. The new version would ultimately create a 10 percent reserve.

Friday’s announcement came just over a week after lawmakers and the governor said they had reached a “framework” for an agreement.