California Budget Deal Ends Impasse With Vote Expected in Days

California Governor Arnold Schwarzenegger and top lawmakers came up with a compromise to close a $19.1 billion deficit and give the state a budget, ending a record three-month impasse with a vote expected next week on the spending plan.

The accord doesn’t raise taxes, as sought by Democrats, nor does it dismantle the state’s welfare system, proposed by Republicans, the leaders said yesterday. Schwarzenegger and the Democratic and Republican heads of the Senate and the Assembly, known as the Big Five, came to the agreement after a final five- hour negotiating session in the governor’s Sacramento office.

“We have a comprehensive agreement,” said Senate President Pro Tem Darrell Steinberg, a Democrat from Sacramento. Lawmakers said more information about the substance of the agreement would be released at an Oct. 6 public hearing.

Passage of the plan would clear the way for Treasurer Bill Lockyer to borrow about $10 billion on Wall Street by issuing short-term notes needed to pay bills until tax revenue comes in later in the year. The impasse led Controller John Chiang to warn about paying bills with IOUs as soon as this month. California is the only U.S. state without an enacted budget.

“No one is pleased with the decisions that we had to make, but the reforms that will come out of this will make it worthwhile,” said Aaron McLear, a spokesman for Schwarzenegger. The Republican has said he won’t sign any final budget unless lawmakers agree to roll back state pension benefits to 1999 levels and to seek voter approval of a permanent spending cap and the creation of a contingency reserve, or rainy-day fund.

No Celebration

“It’s give and take, that’s what it is -- nobody is celebrating here,” Steinberg said of yesterday’s agreement. “We have to look at this in the context of a $19 billion deficit on top of the deficits of the last several years.”

Lawmakers and the governor announced Sept. 24 that they had breached a stalemate that had persisted since the state’s fiscal year began July 1, the longest California has ever gone without a spending plan.

Legislative aides briefed on the details said last week’s framework cuts spending by around $8 billion, less than the $12 billion the governor had proposed, and holds education spending about the same as last year’s level, around $49 billion. The framework also would suspend for two years a tax break that let companies deduct part of net operating losses in a previous year from current-year taxes, said the two people briefed on it.

Conflicting Strategies

Schwarzenegger and Republicans wanted to dismantle the state’s main welfare program and slash $12.4 billion of spending. Democrats proposed $5.9 billion in higher taxes and fees combined with $8 billion of spending cuts.

Calling the accord “a no-tax budget that protects California jobs,” Assembly Minority Leader Martin Garrick, a Republican from Carlsbad, said a vote on the plan is expected on Oct. 7.

“Obviously if we are in agreement, then we think it is a budget that will pass,” said Senate Minority Leader Dennis Hollingsworth, a Republican from Murrieta, north of San Diego.

Schwarzenegger, who is approaching the end of his term, and Democrats, who hold a majority in both legislative chambers, disagreed on how much spending to cut and whether to raise taxes to fill the gap. California requires a two-thirds vote in both the Assembly and Senate to pass budgets, and neither party holds enough seats to meet that threshold. That forced lawmakers to agree on a compromise plan before bringing it to a vote.

Short-Term Borrowing

Lockyer, the state treasurer, said Sept. 27 that he was lining up a short-term loan of more than $5 billion from a group of Wall Street banks to tide the state over with enough cash once a budget is enacted. He said the borrowing would be repaid with the short-term notes.

The state’s constitution says lawmakers must send a budget to the governor by June 15, about two weeks before the start of the new fiscal year. The Legislature has met that deadline five times in the last 30 years. The fiscal 2008 budget was sent to Schwarzenegger on Sept. 16 and signed into law on Sept. 23, the latest the state went without a spending plan until this year.

California, with the world’s eighth-largest economy, issued $2.6 billion of IOUs last year after a similar budget stalemate. That was only the second time since the Great Depression that the state had to use warrants to cover costs and conserve cash.

In January, Standard & Poor’s cut California’s credit grade to A-, its lowest among U.S. states, citing fiscal imbalances and recurring cash-flow problems. S&P has said it may reduce the state’s rating again if the budget crisis worsens.