Photo courtesy of the governor's office
California Gov. Arnold Schwarzenegger announced Friday he will not oppose a compromise budget completed by the Legislature -- essentially ending an 80-day delay in its passage.
SACRAMENTO — The California Legislature approved a few tweaks to its $143 billion state spending plan Friday, strengthening a rainy day fund to win support from Gov. Arnold Schwarzenegger and hopefully bring an end to the state’s record budget stalemate.
Schwarzenegger said he will sign the compromise plan next week, allowing California to resume payments to schools, medical clinics, day care centers and state vendors that haven’t been paid since July 1, the start of the fiscal year.
In the end, legislators bridged a $15.2 billion budget deficit without tax increases and cut billions of dollars in funding to education, health care, and other state-supported programs. Lawmakers ceded to the governor’s demands for a more robust rainy day fund and also removed a funding mechanism that would have essentially borrowed from taxpayers.
But they failed to fix California’s ongoing fiscal imbalance that allows the state to spend more money than it takes in during hard times.
"Unfortunately, the Legislature was unable to make the hard decisions to end our structural deficit and I will continue working with them on that problem until we get that done,” Schwarzenegger said at a Capitol news conference Friday. "But this budget is an improvement of the earlier versions.”
The governor said he was pleased legislative leaders agreed to stronger controls on the state’s rainy day fund and gave him the authority to make spending cuts during the year.
Senate President Pro Tem Don Perata, one of the lead negotiators, said state finances will only get tougher as partisan ideology dominates the Legislature.
"I don’t know what the governor does next year, but he’s got a much bigger problem,” said Perata, D-Oakland, whose term ends in November. "He’s right: We just kicked the can down the street. I don’t understand how he’s going to get any Republican votes next year for a tax increase.”
The impasse dragged on because Republicans opposed any tax increase, while Democrats sought to combine budget cuts with higher taxes on corporations and the wealthiest Californians. Schwarzenegger proposed a temporary 1 cent increase in the state sales tax that would drop after three years.
"Everybody realized, it’s not a pretty budget this year,” said Senate Minority Leader Dave Cogdill, R-Modesto. "Republicans met their goal, which was to try to find a way to get a budget that didn’t do further harm to an economy that’s already hurting.”
Cogdill and Assembly Minority Leader Mike Villines, R-Clovis, pledged to fend off any tax increase proposals again next year while Assembly Speaker Karen Bass, D-Los Angeles, reiterated her call to have a commission review the state’s tax structure.
"We have a tax system that was set up at the beginning of the last century for an economy that doesn’t even exist anymore,” Bass said. "And that’s something we can begin to work on now.”
Schwarzenegger has been trying to fulfill his central campaign promise in the 2003 recall election: to organize the state’s finances.
He had promised to veto the budget lawmakers agreed to without him and passed early Tuesday, saying its rainy day fund was not strong enough. He also said it relied on accounting tricks — such as collecting an extra 10 percent of workers’ income tax in advance and repaying it later — that could lead to an even larger deficit next year.
The four legislative leaders conceded they were uncertain whether they could muster the two-thirds vote of the Legislature required to override his veto and returned to his office to negotiate Thursday.
They agreed to take out the provision to collect workers’ income tax early and replaced it with a larger fine against businesses that fail to report or underreport tax liabilities. They also removed a tax amnesty program that would have let businesses and people who owe the state money pay overdue taxes without penalty.
Lawmakers agreed to ensure the state’s rainy day fund could be tapped only when revenues fall below projected spending — the last remaining piece of the budget reforms Schwarzenegger sought.
The rainy day fund and a proposal to borrow $10 billion against anticipated lottery revenues to help stabilize future budgets will require voter approval, probably in a special election next year. Schwarzenegger said that would likely be set for June.
The rest of the budget approved Tuesday will stand, including $7.1 billion in spending cuts that advocates say will trigger deep cuts to health care in the future.
Education and social service groups criticized the majority Democratic Legislature for ceding to the Republican governor’s demands. They said the spending restrictions on the rainy day fund would limit the state’s ability to maintain programs in lean years.
State Treasurer Bill Lockyer, a Democrat, said the compromise budget amounted to a multibillion-dollar handout to big businesses as permanent tax breaks. The plan allows corporations to transfer tax credits between affiliated companies and, starting in 2010, businesses can claim a refund on taxes they’ve already paid if they lose money the following year.
"This giveaway makes the budget a massive corporate boondoggle that does nothing to fix our structural deficit and, in fact, will make it substantially worse,” Lockyer said in a statement.
Schwarzenegger lamented the long delay in getting a spending plan, saying it had hurt ordinary citizens. He said he would like to see lawmakers face consequences when they fail to reach a deal by their constitutional deadline.
"We know that the system itself is not working, that it’s flawed. Therefore we should revisit it and come up with ways so that we can speed up this process,” he said at the Capitol. "I don’t think it will get done in this building.”
Here’s a look at the spending plan the Assembly and Senate were considering Friday. It would plug a $15.2 billion deficit without borrowing or new taxes. Instead, the budget would:
• Cut $7.1 billion in state spending, including reductions in public transit and human service programs; includes lower-than-projected education funding, although schools will be fully funded under Proposition 98’s minimum funding guarantee.
• Collect $2.3 billion through "accelerations” in revenue by requiring corporations and upper-income taxpayers to pay 30 percent of their estimated taxes in each of the first two quarters of the fiscal year instead of 25 percent.
• Double the penalties on corporations that are late in paying more than $1 million in taxes from 10 percent to 20 percent.
• Collect $1.9 billion by adopting a two-year temporary suspension on deductions for business losses, known as net operating losses, and limiting other incentive credits.
• Close the infamous "yacht tax” loophole that allows people to avoid paying state sales tax on boats, RVs, airplanes and other luxury goods if they take possession out of state and keep the items there for more than 90 days; estimated to raise $21 million annually.
• Change state law to exempt the high-tech industry from paying overtime to highly skilled employees. The industry has balked at lawsuits claiming it has improperly withheld overtime from some workers.
• Borrow against future lottery revenue to secure $10 billion over the next two fiscal years, starting in July 2009. The money would be deposited into a new fund dedicated to retiring debt. Prize payouts would be increased, but no new games or technologies are envisioned.
• Increases the state’s rainy day fund to 12.5 percent of the general fund budget, as Schwarzenegger wanted. Each year, 3 percent of general fund revenue will be dedicated to the fund until it hits the limit.
• Restricts spending from the rainy day fund so it can be tapped only when revenues fall below a specified amount. Democrats initially rejected this proposal, seeking more flexibility to draw from the fund, but ceded to Schwarzenegger’s demand.
• Grant the governor authority to cut up to 7 percent from state operations when revenues fall below expectations. The governor would not be able to cut from the largest areas of the budget — education and health and human services.
• Seek voter approval to change the rainy day formula and lottery securitization plan.
• Remove a previous provision the Legislature approved to take an extra 10 percent in state income taxes from working Californians and repay it later.