California lawmakers break impasse, pass budget

By Jim Christie

SAN FRANCISCO (Reuters) - California lawmakers approved a state budget package on Thursday to close a $42 billion deficit, ending a lengthy standoff with a slate of bills that aim to raise taxes, slash spending and increase borrowing.

Both houses of the Democrat-led legislature passed the package and Gov. Arnold Schwarzenegger, a Republican, is eager to sign it. "Certainly as soon as we can," said spokesman Aaron McLear.

The early morning votes for the 18-month spending plan ended an impasse in the legislature of more than 100 days over balancing California's books. During that time, the state's economy weakened significantly and substantially cut state revenues.

The package provides for $15 billion in spending cuts, $12.8 billion in tax increases and $11.4 billion in borrowing. It also creates a $1 billion reserve for fiscal 2009 to 2010.

Assembly Speaker Karen Bass said those basic points, bitterly contested between Democrats opposed to spending cuts and anti-tax Republicans, would prevent the government of the most populous state from falling off a financial cliff.

"We may have taken a rocky ride down the side of that cliff, but the state is intact and ready to get in gear for recovery," Bass said.

Schwarzenegger applauded lawmakers for endorsing the mix of financial measures in the package along with bills to ease regulations to speed construction projects, open the door to public-private partnerships and provide Hollywood with incentives to keep film production in the state.

"This is the perfect medicine for our ailing economy and it will boost public confidence in California, reassure the financial community and allow us to resume selling our bonds and rebuild our state," he told reporters.

JUST IN TIME

The financial woes besieging California had become so severe state officials had braced for the state's cash account to be depleted this month if a budget was not passed.

Standard & Poor's Ratings Services this month cut California's general obligation bond rating to the lowest of any U.S. state, a rebuke and a warning to the biggest issuer of U.S. public debt that its borrowing costs could jump if it did not close its massive shortfall.

Officials in the state capital of Sacramento scrambled to bolster the state's finances in recent weeks amid an unprecedented revenue crisis resulting from Wall Street's meltdown, rising unemployment, a sharp pullback in consumer spending and the long housing downturn.

They clamped down on spending by putting public works projects on hold, withholding payments to counties for social services and postponing tax refunds. This week Schwarzenegger told state departments to send lay-off warning notices to 20,000 state employees.

Additionally, lawmakers were made fully aware federal stimulus money was at risk if the state's finances remained in doubt, adding pressure to pass the budget package.

"It just got to the point where they just had no choice," said Larry Gerston, a San Jose State University political scientist. "It just became so unbearable that the most principled or stubborn people, you can take your pick, had to think about it."