Budget deal would close California’s deficit but makes rosy projections

Reporting from Sacramento —  The budget deal that state legislators are scheduled to vote on Thursday would close California’s $19.1-billion deficit by cutting state worker pay, trimming public school funding and relying heavily on handouts from Washington, according to new details released Wednesday — and if approved, it would fall out of balance almost the moment the ink dried.

The spending proposal, which would not necessarily stave off the need for IOUs to be issued this year, also includes the sale of state buildings to generate money, rosy revenue assumptions and a relative windfall for higher education, one of the few areas that would see increased funding.

After more than a three-month negotiating impasse during which Democrats dug in against deeper cuts and Republicans vowed to block tax hikes, leaders also agreed to trim spending on in-home care for the elderly and infirm, slightly reduce child care services and take more than $1 billion from state prisons.

But mostly, they settled on accounting sleight-of-hand: deferred payments, borrowed money and optimistic revenue assumptions.

“You have two groups of people up there acting more like petulant children than competent administrators of the state,” said Christopher Thornberg, founder of Beacon Economics, which studies the California economy. “They’re not willing to compromise.”

The state controller’s office said Wednesday that the deal may have come too late to avoid issuing IOUs instead of paying some bills this year. Billions in unpaid invoices that piled up during the monthslong standoff will come due as soon as a spending plan is signed, plunging the state’s depleted treasury into the red.

“It’s a symptom of a budget stalemate that went on too long,” said Garin Casaleggio, a spokesman for Controller John Chiang.

The budget package is the last of Gov. Arnold Schwarzenegger’s tenure and the tardiest in modern state history. A public hearing on the $87.5-billion general-fund proposal lasted less than an hour Wednesday, when lawmakers made available only an eight-page outline of their plan and took no public testimony.

By legislators’ own calculations, the package would shave less than $9 billion from the deficit by cutting programs and suspending corporate tax breaks. That leaves more than $10 billion in other solutions.

One of those is the assumption that the federal government would send California $5.3 billion to help shrink the shortfall. Only $1.3 billion of that aid has been approved by Congress, said H.D. Palmer, a spokesman for the state Department of Finance.

An additional $1.4 billion of the deficit would be explained away with an optimistic economic forecast provided by the state’s nonpartisan budget analyst. And more than $2 billion of the package is pieced together by borrowing from other state funds.

California is one of three states in the nation to require a two-thirds vote of the Legislature to pass a budget or to raise taxes, which means some votes are necessary from the Republicans who form the minority.

The stalemate that often results “inevitably leads to the use of gimmicks to balance the budget,” said state Sen. Joe Simitian (D- Palo Alto), a member of the Senate’s budget panel. “The public is understandably frustrated and angry that the work doesn’t get done.”

The leaders’ largest spending cut would come in the suspension of California’s education-funding guarantee, lowering school spending by $3.1 billion. But more than half of that sum would be an accounting move, deferring $1.7 billion in school bills until the following fiscal year. A $189-million payment to community colleges would also be deferred.

The state’s in-home healthcare program for the elderly, blind and disabled would shrink by 3.6%; through that cut and other means, the state would save $300 million in the program. Child care services provided by the state would be trimmed by $48 million.

The $1.1 billion in prisons savings would come mostly from cutbacks in inmate medical care, which has been under the control of a federal receiver because the courts deemed it inadequate. A past proposal to shift state prison inmates to county jails — vehemently opposed by local law enforcement officials — has been abandoned.

Schwarzenegger had urged lawmakers to eliminate the state’s main welfare program. Instead, the leaders have proposed sparing the axe entirely after cutting welfare benefits heavily a year ago.

Winners in the otherwise austere budget plan would be the state’s two higher-education systems, the University of California and California State University. Both would receive $200 million to compensate for cuts made last year and enough additional money to fully fund projected enrollment growth.

Republican lawmakers bowed to Democratic demands to suspend a corporate tax break that allows businesses to deduct losses from one year from taxes paid in another. The change would save the state $1.2 billion in the budget year.

In exchange, Republicans negotiated a trio of smaller, permanent corporate tax breaks, including roughly $30 million that would benefit a single company owned by a wealthy, politically connected family.

Schwarzenegger had made clear for most of the year that he was more concerned with permanent, systemic changes to the budgeting process than with the line items in this year’s spending plan. Lawmakers answered one of the governor’s concerns by agreeing to place a measure on the 2012 ballot to double the size of the state’s “rainy day” fund and make it harder to withdraw money from the emergency treasury.

Another key concession that Schwarzenegger received from the Democrats who dominate the Legislature is the proposed rollback of a pension boost that state workers received at the height of the dot-com boom. The new, lower pension levels would apply only to future employees.

Current state workers would have their pay cut and be required to contribute more to their pension plan or face furloughs, depending on whether they are covered by a labor contract. The overall state payroll would be frozen under the plan as well. The savings for the state would total $1.5 billion this year.

One of the last remaining pieces of the budget puzzle fell into place late Wednesday as the state and the Service Employees International Union Local 1000, which represents more state workers than any other bargaining unit, struck a contract agreement. Democrats had said they would be unwilling to reduce future employee pensions until a contract was agreed upon.

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