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California lawmakers break impasse, pass budget

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.

California Governor Arnold Schwarzenegger walks to a press conference on the state budget at the State Capitol in Sacramento, California February 19, 2009. REUTERS/Max Whittaker

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.

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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.”


Schwarzenegger and top lawmakers from both parties agreed on the budget package late last week and the legislature held marathon sessions over the long Presidents Day holiday weekend to debate it. The package had enough votes in the Assembly to pass but was one Republican vote short in the state Senate.

Whether Senate President Darrell Steinberg would win that single vote was thrown into doubt on Wednesday after the chamber’s Republican caucus turned on Sen. Dave Cogdill, who as their leader had negotiated the budget package, and replaced him with anti-tax hard-liner Sen. Dennis Hollingsworth.

But Sen. Abel Maldonado provided the pivotal Republican vote in exchange for support from Democrats for altering the budget package’s tax plans, including dropping a proposed hike of 12 cents a gallon in the state’s gasoline tax.

He also won support from Democrats for bills to suspend pay increases for lawmakers when the state’s finances falter and for a ballot measure proposing open primaries.

Concerns and hard feelings mixed with relief that a spending plan would soon be signed into law.

Former eBay CEO Meg Whitman, who is running for the Republican nomination to succeed Schwarzenegger, predicted the package would worsen future state budget deficits. “The budget that was passed by the state legislature is not the solution,” she said in a statement.

Assemblywoman Julie Brownley, a Democrat, said the package was a “monstrosity” and denounced Republicans for dictating terms “repugnant to a majority elected by the populace.”

Bill Whalen, a Hoover Institution fellow and former aide to former California Gov. Pete Wilson, noted the package’s plan for selling debt backed by state lottery revenues relies on voter approval, requiring Democrats and Republicans to campaign together. “The question will be how much bipartisanship will be on display for the voters,” Whalen said.

Schwarzenegger said he will start rallying voters right away for that ballot measure and others within the budget package. “It is very important that we start campaigning now,” he said.