Calif. passes plan to close $42 billion deficit - finally

SACRAMENTO " California lawmakers passed a massive tax increase Thursday along with making billions in cuts, ending a grueling week of negotiations over closing the state's $42 billion budget deficit.

The package of bills was sent to Gov. Arnold Schwarzenegger after the early morning votes in the Assembly and Senate, and the governor is scheduled to sign it today.

The Republican governor called the Legislature's work courageous, noting that Democrats compromised on their opposition to deep spending cuts and some Republican lawmakers set aside their opposition to tax increases.

"Now, instead of worrying every day only about IOUs and about red ink, we can start moving California forward once again," he said. "This action to solve our $42 billion deficit was difficult but courageous and just what California needs."

Both houses of the Legislature got the bare minimum of votes to reach the two-thirds requirement needed to pass the package, which includes $12.8 billion in tax hikes, $15.1 billion in cuts, billions in borrowing and measures intended to stimulate the state's economy.

If the economy doesn't worsen considerably, the plan is intended to balance the state's budget through June 2010. The Senate began debating before dawn Thursday after a moderate Republican, Sen. Abel Maldonado of Santa Maria, agreed to provide the final vote.

The Legislature routinely needs to do that kind of vote-trading to reach the two-thirds threshold necessary to pass budgets. Other anti-tax senators won their own provisions, including a tax credit for buyers of new homes to appease Republican Roy Ashburn of Bakersfield and, for Lou Correa, a Democrat from Anaheim, tens of millions of dollars for Orange County.

The accord came after both houses began meeting on Valentine's Day and set two records for the longest continuous legislative sessions in state history " one by the Assembly earlier in the week and the 451⁄2-hour marathon that ended Thursday in the Senate.

"This has been a long, very painful journey," said Assembly Speaker Karen Bass, D-Los

Angeles.

The legislative ordeal began in December, when Schwarzenegger called the second of three successive special sessions to deal with California's growing fiscal crisis. As each week passed, the financial news grew worse.

Refunds to taxpayers were delayed, payments to state vendors stopped, state workers were ordered to take unpaid furlough days and the Schwarzenegger administration began sending layoff notices that would have affected some 10,000 state workers.

Even under the budget deal struck Thursday, some employees might have to be laid off as part of Schwarzenegger's plan to save 10 percent from the government payroll, said Vicki Bradshaw, the governor's cabinet secretary.

"There will be some layoffs. We expect to get 10 percent of the employee cost savings through the combination of furloughs, holidays, overtime and layoffs," she said, although she could not say how many jobs might be affected.

As California's deficit grew and the impasse to resolve it dragged on, the state's bond rating sunk to the lowest in the nation, preventing the state from borrowing money for daily expenses or infrastructure improvements.

Thousands of public works projects, such as carpool lanes on Interstate 580 in the San Francisco Bay area, ground to a halt, putting tens of thousands of construction workers out of a job.

Hours after the budget package was approved, the state Department of Finance announced that work on 276 road, school and other projects would continue. It was scheduled to stop if a budget was not in place by Thursday.

"This is the perfect medicine for our ailing economy," Schwarzenegger said of the approved budget package.

Shortly after the early morning votes, the governor emerged from his office and disconnected a large clock that had been counting the number of days " 106 as of Thursday " that the Legislature had failed to act since he declared the first special session in November, shortly before the previous Legislature left office.

Despite the relief among lawmakers and the governor, the package was tough to swallow for all sides.

The tax hikes include an increase of 1 cent on the dollar in the state sales tax, a boost in the personal income tax rate and a higher vehicle license fee, which Republicans argued would do more harm to the state's precarious economy.

"You may count this as a win because you got a few Republicans to vote for it," said Senate Minority Leader Dennis Hollingsworth of Murrieta, who took over the leadership position this week after a midnight coup. "The taxpayers of California are going to view this as a loss."

Assembly Minority Leader Mike Villines of Clovis helped negotiate the package and provided one of the few Republican votes in his house. He vowed to never agree to tax hikes again but said lawmakers had no choice this time.

"This will be a very tough vote, but I'm willing to do it because I think the cost of not doing it is worse," he told fellow lawmakers on the Assembly floor.

For Democrats, the legislative package contained its own bitter medicine.

Education is to be cut by $8.6 billion, potentially leading to teacher layoffs, salary reductions and postponed purchases of textbooks and other material.

Funding to the California State University and University of California systems was cut by $264.4 million. Health care, welfare and in-home support services for the elderly and disabled also will see significant reductions.

"What I think what we're showing here is that we can solve the most difficult of problems on behalf of the people of California," said Senate Majority Leader Darrell Steinberg, D-Sacramento. "There were decisions we were called upon to make over the past couple of months that were very difficult and very painful."

The package includes $11.4 billion in borrowing and six ballot measures, some of which authorize fund transfers and selling bonds, that will go before voters in a May 19 special election.

The most contentious of those will be a cap on state spending and establishing a rainy day fund, both of which have long been Republican priorities. If voters approve the cap, most of the tax increases will remain through the 2013-14 fiscal year. If it fails, the taxes will last only two years.

That deal was struck to mute opposition from state employee unions, who don't like the idea of a spending cap and are among the most influential players in California election campaigns.

The cap would limit annual state spending based on revenue growth over the previous 10-year period. Opposition already was gathering.

Jon Coupal, president of the Howard Jarvis Taxpayers' Association, said there were too many loopholes in the spending-cap language to make it effective.

"The question voters are going to have is whether or not they want two years of additional taxes or a meaningless spending cap," he said.

Despite the tax increases, the plan reduces California's general fund spending in the current fiscal year by nearly $13 billion " from $103 billion to $90.7 billion. For 2009-10, it sets a spending plan of $96.3 billion.

It marked the earliest time lawmakers had approved a spending plan for the coming fiscal year.

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Associated Press writers Judy Lin and Juliet Williams contributed to this report.

Associated Press

The California Legislature adopted a package of bills Thursday to fill California's $42 billion budget deficit through June 2010. It calls for a midyear fix to immediately reduce state spending and raise taxes.

Revenue

The plan would raise up to $12.8 billion through June 2010 by imposing a variety of temporary taxes. The higher taxes would be in effect for two years. The taxes would remain longer " through the 2013-14 fiscal year " if voters approve a state spending cap during a special election in May.

Here are some of the specific taxes:

- Increases the state sales tax by 1 cent on the dollar.

- Raises the fee for licensing vehicles to 1.15 percent of market value, up from the current .65 percent.

- Raises the state personal income tax rate by 0.25 percent.

- Reduces the amount taxpayers can claim on a dependent care credit to the federal level of $100 instead of $300, saving $1.4 billion.

Cuts

Among other cuts, the budget proposal:

- Reduces education spending by $8.6 billion over two years.

- Imposes a 10 percent across-the-board cut to the University of California and California State University systems.

- Continues furloughs for 238,000 state workers, trims overtime pay and eliminates two paid state holidays.

- Eliminates annual cost-of-living increases for recipients of the state's welfare-to-work program.

- Eliminates the state and federal cost-of-living increase for seniors and the disabled who are receiving Supplemental Security Income/State Supplementary Payment.

- Depending on whether the federal government provides additional aid, the budget compromise would make further reductions to Medi-Cal, CalWORKS and other social service programs.

Borrowing

- Approves a $5 billion plan to borrow against the value of the lottery's future revenue. Voters must approve changes to the lottery to make it more marketable.

- Authorizes the state to take out $6 billion in bonds to cover bills that will not get paid in the current fiscal year.

- $400 million transferred from various special funds.