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Lockyer, Chiang Say California Budget Pact Is Just the Start

SAN FRANCISCO — California Gov. Arnold Schwarzenegger and legislative leaders late Monday agreed to close the state’s $26.3 billion budget deficit with a combination of spending cuts, local government funds and accounting gimmicks that drew protest from across the state.

Beyond that, the details of the plan remained fuzzy today, as lawmakers’ staff worked to write the final bills and the state’s treasurer and controller withheld judgment as to whether the agreement will truly balance the budget.

The budget agreement includes $15.6 billion of spending cuts, $2.1 billion of borrowing, $3.9 billion of new revenues, and $2.7 billion in accounting changes. Added to earlier reductions, the spending cuts reduce the state’s general fund to about $78 billion this fiscal year from about $100 billion last year.

“Getting this budget agreement enacted will be a big step forward, but our state still has a lot of hard work and sacrifice ahead before we are out of the woods,” Treasurer Bill Lockyer said in a statement today.

Lawmakers are hoping that the budget fixes will convince investors that it’s safe to buy the state’s short-term debt, allowing a cash-flow borrowing that would let the state to stop paying bills with IOUs.

Lockyer and Controller John Chiang both said they had not seen enough details of the budget to say if or when that would be possible.

“At this point, it’s too early to assess the effect of the budget deal on our cash-borrowing needs,” Lockyer said. “Until enactment of the budget changes by the Legislature and the governor later this week, it will not be possible for anyone to estimate or announce the size, sequence or scheduling of any short-term cash borrowing.”

The budget fix will cost local governments, excluding schools, about $4.4 billion. The state will borrow $2.1 billion of city and county tax revenue, take $1.3 billion from redevelopment agencies, and intercept $1 billion in local gas taxes.

Other spending cuts include $6 billion for schools, $2.8 billion for public universities, $1.2 billion from corrections, $1.3 billion for MediCal, the state’s Medicaid program, and $1.3 billion from state worker furloughs.

But Democrats blocked the deepest cuts proposed by Schwarzenegger in May, including the complete elimination of the CalWorks, the state welfare program, and Healthy Families, which provides health insurance to low-income children. The agreement cuts $528 million from CalWorks and $124 million from Healthy Families.

“We have closed the deficit in a responsible manner, and we have protected the safety net,” said Assembly Speaker Karen Bass, D-Los Angeles.

Schwarzenegger said the last few hours of negotiations were “like a suspense movie,” but called the final outcome a “great accomplishment” because it closed a historic budget gap without imposing new taxes.

The budget plan is lighter on new revenues than Democrats wanted because Republicans refused to support higher taxes, and the state constitution requires two-thirds majorities to impose new taxes, forcing Democrats to garner Republican votes to pass a budget plan.

As new revenue, the agreement includes a plan to sell the State Compensation Insurance Fund — a workers compensation program for hard-to-insure private companies — for $1 billion, as well as plans to sell some state office buildings and to expand offshore oil drilling.
The agreement also includes $2.7 billion of accounting changes that will bring revenue forward from fiscal 2010-11 and delay expenses until the upcoming year. The state will bring forward revenue by speeding up collection of 2010 personal income and corporate taxes. It will delay spending by paying state workers their final June 2010 paychecks a day late, pushing the expense into July.

The California Legislature will vote on the deal as soon as Thursday. 

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