State budget battle over

Governor promises to sign revised deal after a record 81-day impasse.

Published online on Friday, Sep. 19, 2008

SACRAMENTO -- It's finally, mercifully, over.

The longest budget battle in state history ended Friday as lawmakers finalized and Gov. Schwarzenegger promised to sign a $143 billion budget plan that does not raise taxes but relies on spending cuts, accounting maneuvers and closure of some tax loopholes to bridge a $15.2 billion deficit.

The final compromise -- coming 81 days after the start of the fiscal year -- avoids a threatened veto by the governor and means state vendors, some Medi-Cal providers and others will be paid again in a matter of days.

But because lawmakers did not solve the state's chronic imbalance between spending and revenues, next year's budget fight is likely to be just as grueling, Capitol observers said.

"It's just going to be harder," said Sherry Bebitch Jeffe, a political analyst at the University of Southern California. "All they've done is slide things a little bit down the road."

The new fight will begin soon enough -- in January when Schwarzenegger rolls out his 2009-10 plan for the fiscal year that begins July 1.

The Senate and Assembly finalized this year's plan Friday afternoon, passing with no debate legislation that tweaks the budget to fulfill the governor's demands. The governor said he will sign the budget Monday or Tuesday, when all the bills reach his desk.

"Frankly, I'm just glad that this is over," said Assembly GOP Leader Mike Villines of Clovis. "Nobody is proud of having a record-setting debate. ... Our hope is to never have to do this again."

Republicans scored a political victory by resisting a tax increase, but all lawmakers saw their approval ratings plummet as the stalemate kept the state from paying some of its bills.

"There were angry people, frustrated people, people who didn't want to hear about why things were not working -- they just wanted them fixed," said Assembly Member Juan Arambula, D-Fresno.

The new deal removes a much-criticized $1.6 billion plan to withhold 10% more from taxpayer paychecks, only to refund the money months later. Instead, the state would raise an estimated $1.5 billion by doubling fees on large corporations that underreport taxes.

Lawmakers also passed a bill to put stronger controls on when the state's rainy-day fund can be tapped. The Legislature earlier agreed to grow the fund from 5% of the general fund to 12.5%. The changes are a concession by Democrats, who are lobbied by advocates who fear the fund will rob money from health and social service programs.

"It's not a good budget," said Senate President Pro Tem Don Perata, D-Oakland. "No one is running around here defending this budget."

The stronger rainy-day fund requires voter approval, as does a plan to borrow $10 billion against the state lottery for future budget years. A special election, costing up to $100 million, is likely to be called for March or June.

Had Schwarzenegger followed through with his veto, it would have been the first time in modern California history that a governor rejected an entire budget.

The governor retains the right to veto line items in this year's plan, most of which passed the Legislature on Tuesday. The cuts, if any, won't be known until he signs the budget.

At a news conference Friday, the governor said he was pleased the budget did not steal from local governments, but "unfortunately the Legislature was unable to make the hard decisions to end our structural deficit."

The budget includes $7.1 billion in cuts but covers much of the rest of the $15.2 billion deficit with accounting maneuvers and by simply collecting more taxes sooner from millionaires and those who pay taxes quarterly. Money also is raised by temporarily suspending a rule that allows businesses to write off losses reported in previous years. But the budget expands that tax break, as well as others, in future years.