UPDATE 1-California budget fight opens new front on TV

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By Jim Christie

SAN FRANCISCO, July 14 (Reuters) - As California Governor Arnold Schwarzenegger and lawmakers were set to resume talks on Tuesday to arrive at a state budget agreement, the Hollywood icon turned politician hit the airwaves with a television commercial underscoring he is no mood to compromise.

Whether dispirited Californians will respond, however, is uncertain, analysts said.

The Republican governor said in the 60-second spot that he would not sign a budget that plugs a $26.3 billion deficit if it includes higher taxes and excludes changes in state government he has said will prevent welfare fraud.

"And I will not sign a budget that pushes our financial problems down the road, because the road stops here," Schwarzenegger said in the commercial, which aired amid growing concerns on Wall Street about the state's finances, especially its cash account.

The state government started its fiscal year on July 1, and without a balanced budget agreement it is quickly burning through its cash.

That has forced finance officials, grappling with declining revenues because of the recession and rising unemployment, to issue IOUs in order to conserve cash, promising payment to taxpayers owed refunds and vendors owed money for goods and services for only the second time since the Great Depression.

BROADCAST BUDGET BATTLE

Schwarzenegger's TV commercial came amid hope in the state capital of Sacramento that budget talks are nearing a successful conclusion after fits and starts in recent weeks.

The governor and top lawmakers of the state's Democrat-led Legislature have essentially agreed they will balance the state's books with deep spending cuts.

Democrats have conceded state revenues have plunged so dramatically that spending levels must drop as well. They have also backed away from attempts to raise taxes, opposed by Schwarzenegger and the Legislature's Republican minority.

Democrats do not have sufficient votes to pass budgets and tax increases on their own, giving Republicans, if they remain united against taxes, an effective veto on spending plans.

Where Schwarzenegger and top Democrats differ most now is on the politically sensitive issue of education spending. He has proposed suspending a two-decade-old voter-approved measure that locks in funding levels for public schools, in order to pare education spending.

The idea has rattled Democrats as it has riled the California Teachers Association, the state's powerful teachers union. The union, an ally of Democratic lawmakers, began airing its own budget commercial last week that sharply criticizes Schwarzenegger and urges: "Protect our schools and put our kids first."

Ramon Cortines, head of the Los Angeles Unified School District, on Monday slammed Schwarzenegger's school funding proposal. It "would open a door to additional and continued cuts throughout the year as the state's deficit grows," Cortines said, adding his district, the nation's second-largest school district, has already made deep cuts in its budget.