California reaches deal to close $26b budget deficit

Gov. Arnold Schwarzenegger and California’s legislative leaders agreed Monday on a plan to close the state’s $26 billion budget shortfall, potentially getting the state back on firm financial ground so it can stop issuing IOUs.

The governor and leaders from both parties announced the compromise after more than five hours of closed-door talks. If the agreement survives its run through both houses of the Legislature, it would provide temporary relief to an epic fiscal crisis that has captured national attention, sunk the state’s credit rating and forced deep cuts in education and social services.

Most analysts and top lawmakers expect that California will face multibillion dollar deficits into the foreseeable future as the economy struggles to recover and tax revenue lags far behind the level of the boom years.

On Monday, the focus was on balancing a state budget that had been thrown way out of whack by declining tax revenue since Schwarzenegger signed it in February during a rare emergency session of the Legislature.

Schwarzenegger and Republican lawmakers refused to raise taxes, limiting lawmakers’ options. Democrats, meanwhile, had fought to preserve basic social services, including welfare, in-home support and health care for low-income children.

In the end, both sides said they had accomplished their goals under extraordinarily difficult circumstances.

“It was like a suspense movie,” Schwarzenegger told reporters after emerging from his office shortly before 7 p.m. “Like I said, we have accomplished a lot.”

The Republican governor described the compromise as a “basic agreement” to close the state’s massive shortfall. The Democratic and Republican leaders of the Assembly and Senate were at his side.

Their plan will be distributed to rank-and-file lawmakers over the next day or two, with votes in the Legislature projected for Thursday. The budget requires a two-thirds vote in each house to pass, meaning all Democrats and a handful of Republicans must support it.

Democrats described the budget-balancing deal as one that protects the most vulnerable members of society.

“We have closed the deficit. … We have protected the safety net,” said Assembly Speaker Karen Bass, D-Los Angeles.

The four legislative leaders said they did not want to release extensive details of the compromise before they had briefed their party caucuses, but the governor’s office said it includes $15 billion in cuts. Those reductions will come on top of an equal amount of spending cuts enacted in February.

The rest of the deficit will be made up by a combination of borrowing from local governments, shifting money from other government accounts and accelerating the collection of certain taxes.

A legislative source familiar with the negotiations, who was not identified because no one was authorized to release details of the agreement, told The Associated Press the cuts included $6 billion to K-12 schools and community colleges.

Cuts also outlines were $3 billion to the California State University and University of California systems, $1.2 billion to the state prison system and $1.3 billion to Medi-Cal, the state’s health program for the poor, the source said.

Welfare, in-home support services and a health care program for low-income children also would suffer cuts but would not be eliminated as Schwarzenegger had originally proposed.

In exchange, the budget includes some of the reforms to social programs Schwarzenegger desired, including changing the duration that welfare recipients can receive benefits.

Schwarzenegger also succeeded in having a proposal to expand oil drilling off the Southern California coast included in the budget agreement.

Under that plan, drilling would be allowed from an existing rig off the Santa Barbara coast, generating about $1.8 billion in revenue over time. The proposal, opposed by many conservation groups, would be the state’s first new offshore oil project in more than 40 years.

At least part of a Schwarzenegger plan to sell state assets, such as San Quentin State Prison and the Los Angeles Memorial Coliseum, was included, but it was unclear which ones. Some state parks also will have to close, but the vast majority of the 220 initially scheduled to be shut down will remain open.

Monday’s announcement ends a little more than two weeks of intense negotiations that began shortly after the start of the fiscal year July 1, after the Legislature failed to pass interim steps that could have delayed the IOUs.

The state controller’s office has been sending the pay-you-later warrants to thousands of state contractors and vendors that provide an array of state services. State finance officials hope a balanced budget will allow the state to obtain short-term loans to cover its daily expenses until most of the tax revenue arrives in the spring.

If it does get the loans, it would be able to stop sending IOUs, which have served as the most visible symbol of California’s cash crisis and opened the state to ridicule. California last issued IOUs in 1992 and has done so only twice since the Great Depression.

“I am optimistic that when all the parts of this complicated deal are fully analyzed, understood and communicated to investors, California will be able to demonstrate we are fully capable of paying our short-term and long-term bills without interruption,” Joe DeAnda, a spokesman for the state treasurer’s office said in an e-mailed statement.

Hallye Jordan, spokeswoman for state Controller John Chiang, said it was not immediately clear how quickly the state would stop issuing IOUs. She said the office needed to see the details of the budget agreement to determine how it would benefit the state’s cash flow in the weeks ahead.

Small business owner Gloria Freeman said the budget impasse has done so much damage that it will take California months to recover.

Her firm, Staff USA Inc., based 25 miles northeast of the state capital, provides medical staff on a temporary basis to state prisons, mental health and developmental centers and has been receiving IOUs. She has been forced to lay off five of her 55 administrative employees.

“It’s taken them this long and it’s had such a negative affect. It’s like the reverse economic stimulus package for California,” Freeman said.

The state’s ability to function by issuing IOUs to contractors was projected to last until early September without a balanced budget in place. Payments to the state pension funds and paychecks to state workers would have been in jeopardy beyond that point.

Some 200,000 state government employees already have been ordered to take three days off a month without pay, the equivalent of a 14 percent pay cut. Those furloughs had been expected to continue through next June, shutting many government offices for three Fridays a month.

While California has been criticized for spending beyond its means, much of the current deficit can be traced to a steep economic downturn that has robbed the state of tax revenue.

Personal income fell this year in California for the first time in 70 years, leading to a 34 percent plunge in income tax revenue during the first half of the year.

The $26.3 billion shortfall amounts to roughly a quarter of the state’s general fund, the account that pays for day-to-day state services. The sheer size of the deficit meant that any effort to balance the state’s books would be felt throughout the state, from college students seeing a sharp increase in fees to local police and fire departments that face cuts as the state takes some $3.7 billion from city and county governments.

Paul McIntosh, executive director of the California State Association of Counties, called it the largest raid on local governments’ coffers in state history.

“This is, of course, one of the most difficult economic times to face our state since the Great Depression, so none of these were easy choices,” said Assembly Minority Leader Sam Blakeslee, R-San Luis Obispo. “I think we selected a path which will lead the state back to the point where we will be strong.”

Source: AP