SAN FRANCISCO - California Democrats passed legislation to reduce the state's two-year, $41.8 billion deficit by $18 billion - without any Republican votes - before adjourning late last week.

Gov. Arnold Schwarzenegger promised to veto the legislation and called the Legislature back into an emergency Christmas week session.

The Democrats' plan would have raised $9.3 billion in taxes without any Republican legislators' votes. It also included $7.3 billion in spending cuts and $1.5 billion of interfund transfers. The plan was controversial because it skirted a constitutional requirement for a two-thirds legislative majority vote to enact tax hikes by reclassifying existing taxes as fees and then replacing those taxes with new taxes in the same amount, yielding new net tax hike.

The Democratic plan - which also accelerated $3 billion of infrastructure bonding - didn't include enough "economic stimulus" or spending cuts for the Republican governor. Schwarzenegger asked lawmakers to reduce some environmental review requirements on construction projects and to ease some labor standards to stimulate economic growth.

"It's very important that we have a comprehensive solution to the budget," Schwarzenegger said at a press conference Friday. He said the budget fix should include his economic stimulus plan, measures to improvement government efficiency, foreclosure relief, and equal amounts of spending cuts and revenue increases.

"It's a four-legged stool," he said. "They failed at all of those things. The only thing they did really well in was to increase taxes."

California faces a $14.8 billion deficit in its $103.4 billion fiscal 2008-2009 general fund budget, and state fiscal officials expect the gap to grow to as much as $25 billion next year.

Standard & Poor's this month cut the state's short-term credit rating to SP-2 from SP-1 after Controller John Chiang said the state will have more bills coming due than cash coming in by the end of March. The rating agency also placed the state's A-plus general obligation bond rating on CreditWatch negative on concern over the state's inability to address its budget gap.

Democratic and Republican lawmakers have been unable to agree on solutions. Republicans legislators want to impose massive cuts in education and social services spending to close the gap. Democrats have called for equal amounts of spending cuts and tax increases.

Neither political party could muster the two-thirds majority normally needed to pass a budget package, prompting the Democrat's simple-majority solution last week. Schwarzenegger didn't complain about the creative legislative solution, but he said Democrats should have included equal amounts of spending cuts and tax hikes in the package.

Democratic leaders said they'd passed the best package they could cobble together.

"The governor's haste is a waste of $18 billion in solutions that could have helped with our cash crisis and our budget deficit," said Assembly Speaker Karen Bass, D-Los Angeles, noting that Schwarzenegger "has consistently been unable to produce even a single vote for a single budget solution."

Standard & Poor's said the state must address the budget gap soon to avoid a downgrade to its long-term rating.

"Should the state not enact timely mid-year budget gap closing measures by February 2009, or should the state's cash position weaken significantly compared with recently revised state cash flow projections, the long-term GO and lease ratings could be lowered." Standard & Poor's said in a Dec. 10 report.

Alicia Trost, a spokeswoman for Senate President pro tempore Darrell Steinberg, D-Sacramento, said Steinberg and Bass would continue to negotiate with Schwarzenegger until they agreed to a deal that would garner the governor's signature, but they will not call rank-and-file lawmakers back to Sacramento until a deal is reached.

Trost said the Senate president expects to reach an agreement before the end of the year and will call members back into session to pass it over the holiday if necessary.

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