State budget battle over

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.

State Treasurer Bill Lockyer, a Democrat, said the provisions amount to a "massive corporate boondoggle." He ripped the spending plan as "the most irresponsible budget of the past half-century."

Schools will get more money than last year, but not enough to keep up with rising costs, advocates say.

In the Valley, cuts to some social service and health programs could hit hard. The thousands of low-income families that rely on the Healthy Families health insurance program will face higher premiums. The budget also includes a suspension of cost-of-living increases to low-income elderly, blind and disabled residents.

Also cut was a $2 million grant for the California Partnership for the San Joaquin Valley, a task force charged with improving the region's economy.

The group will run out of state money by July 2009, unless it can get a new grant next year.

"Not to have state funding would be pretty devastating," said Pete Weber, a partnership board member.

Lawmakers restored a 10% cut in reimbursements to Medi-Cal providers made earlier this year -- a big hit for Valley providers -- but the increase won't take effect until March.

Politically, there were few winners in a budget battle that took longer to resolve than any in the state's history, beating the previous mark by some three weeks.

If anyone claimed an upper hand, it was Villines and Senate GOP Leader Dave Cogdill of Modesto, who were able to keep GOP members united in voting against tax increases, said Bebitch Jeffe, the political analyst.

"The only people who really didn't blink when it came to something significant was the Republican legislative caucus," she said. "But the citizens of California were not among the winners because we're being [saddled] with more debt because the problem of the deficit has not been resolved."