Calif. lawmakers begin debate on $26B budget deal

SACRAMENTO, Calif. - Whether California can stop issuing IOUs or continues to slide toward insolvency is in the hands of state lawmakers, who are being asked to vote on a complex budget plan struck by Gov. Arnold Schwarzenegger and the four legislative leaders.

Under the compromise to be considered by the Legislature, the state hopes to solve less than 60 percent of a projected $26 billion problem with spending cuts. The rest will involve one-time raids on local government funding and accounting maneuvers, such as deferring state employee paychecks by one day for a savings on paper of $1.2 billion.

The compromise spending plan is scheduled to be considered in the 80-member Assembly and 40-member state Senate on Thursday afternoon. But given past budget debates, the package is not likely to be voted on until early Friday.

Legislative leaders acknowledge the plan is imperfect and contains distasteful provisions such as offshore oil drilling and cuts across all major programs, including education, prisons, health care and welfare. But they're making their case to 115 other lawmakers that their plan is vital to address the state's cash-flow crisis.

"Given the enormity of the numbers, I'm damn proud of what the Legislature and the governor have done here to avoid a complete catastrophe," state Senate President Pro Tem Darrell Steinberg had said.

The overall deal needs to satisfy the bond markets so California will be able to take out short-term loans needed to cover daily expenses until next spring, when most of the state's tax revenue arrives. State Treasurer Bill Lockyer has said it was too soon to tell the impact of the deal on the state's borrowing needs.

Obtaining those loans is essential to the state's ability to stop issuing IOUs to thousands of state contractors and vendors, which it has been doing in an effort to conserve cash. The total amount of IOUs issued for July alone was expected at nearly $3 billion.

Unless the budget for the current fiscal year is balanced by late August, the state controller has warned that California's cash shortage will grow so acute that he may start paying government workers with IOUs and halt contributions to state pension funds.

State employees also have been furloughed three days a month, the equivalent of a 14 percent pay cut, and the state's bond rating is hovering near junk status.

On Wednesday, Schwarzenegger predicted the agreement to balance the state's books would get through the Legislature despite "some hiccups, some obstacles, some bumps in the road" put up by special interest groups.

But the plan's passage remains uncertain in a fractious Legislature that has been mired in a seemingly endless fiscal crisis for at least the past two years. Lawmakers from both parties also are reluctant to anger their constituents - not to mention jeopardize their own political ambitions - through a raid on local governments. Local governments have already announced they are ready to sue.

"We're going to fight Sacramento," said Los Angeles Mayor Antonio Villaraigosa about the city losing $240 million over one year from the tentative pact.

The plan would sell off part of the State Compensation Insurance Fund, a quasi-governmental agency that is the state's largest writer of workers' compensation insurance, for an estimated $1 billion. The state Legislature's budget analyst has said it's unlikely a sale could be completed by the end of the fiscal year, June 30, 2010.

The plan also would push back state employee paychecks by one day so that paychecks originally slated for June 30 would be issued on July 1, the start of the 2010-11 fiscal year.

"It doesn't close the deficit," said University of Southern California political scientist Sherry Bebitch Jeffe. "Are they going to next year shift the last paycheck over again? That doesn't solve the problem."

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Associated Press Writer Michael Blood in Los Angeles contributed to this report.