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California Still Can't Find a Fix

SAN FRANCISCO - California lawmakers yesterday appeared no closer to agreement on a plan to deal with the state's deficit, even in the face of a deadline looming at midnight today.

But whatever budget emerges from the debate - if one indeed emerges - appears likely to target local governments' gas tax and redevelopment funds.

The state is facing a $24 billion general fund deficit for the fiscal year that begins Wednesday, as well as a looming liquidity crisis.

But negotiations over a legislative package to close the deficit and address the cash crisis appear to have broken down over the weekend.

With the Legislature's majority Democrats unable to obtain the Republican votes needed to reach the two-thirds threshold required for bills to take effect immediately as urgency measures, and to adopt tax increases they had proposed, the Democrats moved forward with a budget package passed on a majority-vote basis Sunday and yesterday.

That means any cuts in the bills won't take effect for 90 days, and a tax and fee swap that Democrats believe exploits a loophole permitting majority-vote taxes on tobacco and oil production is all but certain to be hung up in court challenges.

In any case, Republican Gov. Arnold Schwarzenegger promised to veto the bills.

Absent a reversal in course by the end of today, state Controller John Chiang has said that his office as of Thursday will begin paying some creditors - including state vendors, local governments, and taxpayers owed refunds - with registered warrants, or IOUs, that would not be redeemed until October.

Despite the apparent gap between the governor and the Democratic legislative leadership, they both support proposals to redirect gasoline tax revenues away from local governments, and to move money from redevelopment agencies into the general fund.

In the budget bills they passed with a majority vote, Democrats approved the shift of $986 million in gasoline excise-tax revenue to the general fund from cities and counties during fiscal 2010, and another $745 million in fiscal 2011.

The Democrats' measure would end the shift after two years, while the governor would make it permanent.

Four California cities have issued bonds designed to be repaid with revenue from their annual gas-tax allocation.

The League of California Cities and the California State Association of Counties have said they would back a lawsuit against the gas-tax shift if it is adopted, arguing that it violates the state constitution.

Schwarzenegger also proposed a bill that would boost the general fund by $350 million for fiscal 2009 at the expense of local redevelopment agencies.

It revives an earlier redevelopment shift rejected by a trial court judge earlier this year on state constitutional grounds. The administration believes it has new language that addresses the issues raised in the court case, which remains on appeal.

The Democrats took Schwarzenegger's proposal and added $700 million in new shifts over the next two years.

Both Chiang and state Treasurer Bill Lockyer have warned that adoption of a plausibly balanced budget was needed by today in order for California to have a chance at marketing some $10 billion in revenue anticipation notes it would have to sell in the coming weeks to manage cash flows over the course of the fiscal year.

If there is no budget deal, Chiang is planning to issue registered warrants, or IOUs, starting Thursday.

Chiang and Lockyer issued a joint release last week imploring lawmakers to take action to avoid the issuance of state IOUs.

"It will greatly increase the cost and difficulty of completing essential cash-flow borrowing in the next few months," they said. "And it will undermine, perhaps for years, California's ability to sell its long-term general obligation bonds."

Senate president pro tempore Darrell Steinberg was planning a vote after press time on a stopgap proposal to defer some payments, and delay the need for IOUs to be issued.

Yesterday Lockyer spokesman Tom Dresslar said the treasurer was withholding comment on budget legislation until a plan is adopted by the governor and Legislature.

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