No Budget Deal Yet as Deadline Nears

The fate of the budget package that Gov. Arnold Schwarzenegger wants to see on the March ballot remained unclear Thursday as lawmakers, facing a deadline of tonight, struggled over how to formulate a constitutional spending cap that would prevent the state from running multibillion-dollar deficits.

Lawmakers were near consensus on how to structure the $15-billion borrowing plan that Schwarzenegger seeks to accompany the spending cap. But Republican legislators said they were ready to block the bond measure if there was no progress on spending limits.

The two proposals represent the governor’s first significant actions on the budget, and are being seen as a test of his ability to work with legislators.

The mood in the Capitol fluctuated throughout Thursday as lawmakers shifted from thinking they were close to a deal on the cap to throwing up their hands in frustration.

Schwarzenegger, who has spent two days this week traveling the state to campaign for his fiscal recovery package, has so far declined to comment on which changes he would be willing to make. Today, he is scheduled to be a guest on five radio talk shows and to appear at a noon rally in Tracy, 70 miles south of Sacramento.

Some Democrats said it was time for him to show his hand.

“There’s not a give and take,” said Sen. Don Perata (D-Alameda). “It hasn’t been set up. I wish to God that the governor would just stay here, get the [legislative leaders] in a room and sit down and do some hard negotiating, and by midnight we’d have it. I’m convinced we’d have it one way or the other.

“At least he’ll know he took his best shot and we will have had our best opportunity,” Perata continued. “But there are two problems right now: not knowing exactly where the point of compromise might be and where his Republicans are in the Senate.”

Schwarzenegger spokesman Rob Stutzman said the governor remained optimistic that agreement would be reached by today.

“But his resolve is firm that the deal must be a spending limit that provides long-term structural reform that ensures California taxpayers that there will never be a deficit created again by overspending,” Stutzman said. “And if the Legislature can’t get there by tomorrow night, we’ll move to the ballot next November with a very tough spending limit.”

Stutzman said “the problem at the moment” is “making sure there are enough Democratic votes for a spending limit.”

Democrats have warned for several days that the spending cap Schwarzenegger proposed last week would cripple essential government services and give the governor too much power to make midyear budget changes without legislative approval. On Thursday, they shopped around their own proposal.

It would create a rainy-day reserve that the state could have available when revenue dropped in a bad economy. In good years, half of all surplus revenue -- money the state receives above the amount needed to pay for programs approved in the budget -- would go into the reserve fund until it was equal to 5% of the prior year’s budget.

The Legislature would be prohibited from dipping into the reserve unless the state began running a deficit.

Where the Democrats differ significantly from the governor is in how they calculate state revenue. Under the Democratic plan, money sitting in the rainy-day reserve would be counted as part of that total.

Senate President Pro Tem John Burton (D-San Francisco) said the proposal was not a hard cap on spending -- as Republicans were demanding -- but a “budget stabilization” measure.

Unlike the governor’s plan, which would give him authority to cut any program he wished if the budget fell out of balance during the year, the Democratic plan would leave it up to the Legislature to pass laws to remedy any imbalance by a simple majority. The governor would have veto power over those laws.

Democrats hold a majority in both the Assembly and Senate.

Assembly Speaker Herb Wesson (D-Culver City) called his party’s plan “a very good work product, and one that could be a framework for a deal if individuals truly want to get away from business as usual. This is no trick. This is not smoke and mirrors.”

He characterized the cap initially proposed by the governor as “draconian” and said it was not acceptable to a majority of Democrats.

Republican legislators, meanwhile, said they would not vote for the Democratic plan.

“This is a placebo,” said Senate Republican Leader Jim Brulte of Rancho Cucamonga. “It will do absolutely nothing but make the Democrats feel like they’ve done something. That’s what got us into trouble, and it’s time to fix it. And this doesn’t.”

Brulte said the Democratic plan would essentially inflate the state’s revenue projections every year, giving lawmakers free rein to overspend.

“What they say is the budget has to be balanced,” he said. “But they allow -- at the beginning of the process -- the Legislature to simply make up a number as to what revenue will be. What has gotten California in trouble over the last three or four years is the Legislature making up numbers on revenue and overestimating revenue and then underestimating expenditures.”

Brulte said that under the Democratic proposal, “you can simply assert that we’re going to have $82 billion in revenue next year and when $79 billion shows up, you’re $3 billion short. I said, ‘Well, what’s the mechanism to correct that next year?’ There is none.”

Republicans also noted that both the Democratic idea and Schwarzenegger’s proposal applied only to the state’s general fund, and would have no impact on the tens of billions of dollars in state special fund spending.

Republicans say both plans are flawed, because all it would take would be some crafty accounting to avoid the cap altogether; lawmakers could just move programs from the general fund into a special fund.

Democrats, however, rallied around their plan and expressed hope that the governor would compromise with them.

“Over the last 18 hours, his folks have been very receptive,” said Assembly Speaker-elect Fabian Nunez (D-Los Angeles). “Although the deal could fall apart at any given minute, at this point things look very hopeful.”

Republicans were less critical of the plan Democrats were drafting to shorten the period in which the state would repay the up to $15 billion that Schwarzenegger wants to borrow, largely to pay off a deficit leftover in this year’s budget. Under the Democratic plan, the tab would be paid off over seven years rather than 30, as the governor has proposed. Repayment of the bond money would be guaranteed with existing sales taxes under the Democratic plan.

That sales tax revenue currently goes to local governments, which would receive more property tax money in its place.

Republicans said the Democratic borrowing plan was similar to that of bond issues they had already approved in the current budget.

Despite talk that today’s deadline for putting the measure on the ballot could be extended, legislative leaders said a resolution must be reached by tonight.

“According to the secretary of state, the deadline is real,” Burton said. “Very real. I’ve been pessimistic [from] Day 1. I’m still pessimistic, but hope springs eternal.”

Times staff writer Peter Nicholas contributed to this report.