Governor, top lawmakers announce budget deal

Gov. Arnold Schwarzenegger and legislative leaders said Friday night that they had reached an agreement to end the state’s longest-ever budget stalemate.

The announcement came after hours of closed-door meetings in the governor’s office on how to close the state’s $19.1-billion deficit. The new budget year began July 1, and the state government has been operating without a spending plan since then.

Senate President Pro Tem Darrell Steinberg (D- Sacramento), flanked by the state’s three other legislative leaders, said in a scrum with reporters outside the governor’s office that the negotiators had struck a “comprehensive agreement.” He declined to share any details about what it contained.

“The details will come out next week,” said Aaron McLear, Schwarzenegger’s press secretary.

Lawmakers promised a public hearing on the proposed budget package Wednesday and a vote of the full Legislature as early as Thursday. Before final passage, the leaders must persuade two-thirds of the Assembly and Senate to support the plan.

That could prove challenging. Past budget deals put together by legislative leaders and the governor amid California’s ongoing fiscal crisis have been derailed by the Assembly and Senate rank and file, forcing their leaders to keep them in chambers for days as they and the governor tried to round up votes.

“We think it is a budget that will pass,” said the Senate’s GOP leader, Dennis Hollingsworth of Murrieta.

Although the governor and leaders refused to provide an outline of their agreement, Democrats and Republicans alike have previously said the budget would not contain any broad new taxes.

According to sources close to the discussions, the plan contains roughly $7.5 billion in cuts to services. They spoke on condition of anonymity because they were not authorized to speak publicly.

The sources said Schwarzenegger and other Republicans had backed down from their most austere budget-cutting demands, including the elimination of the state’s main welfare program and day care for 140,000 children in low-income families.

But there will be cuts to schools, including a suspension of voter-approved formulas guaranteeing a set amount of revenue for K-12 education. Reductions in other social and health services are also expected, though the depth of those was not immediately clear.

The plan includes a two-year suspension of a corporate tax break that allows businesses to deduct losses in one year from taxes paid in another, those close to the talks said. The suspension would save the state roughly $1.4 billion.

Republican leaders were reluctant to part with the tax break, which they had fought hard to create. To get their concurrence, Democrats agreed to replace it with smaller corporate tax reductions that would be permanent, one source said.

“It’s give and take — that’s what it is,” Steinberg said.

One of the biggest obstacles to an accord has been Schwarzenegger’s demand that pension benefits be scaled back for new state employees.

Democrats have refused to make sweeping changes to the pension system until the state’s largest public union, Service Employees International Union, Local 1000, completes contract negotiations with the administration. There is no new contract yet, and it is not clear how that issue was resolved, although Steinberg said Friday evening: “We’re very hopeful that they’ll reach agreement.”

The governor has also threatened to veto any budget that does not include some controls on future state spending. Legislators have agreed to place a measure on the 2012 ballot to meet that demand, one of the sources said.

The budget deficit would also be closed partly by selling an array of state properties and buildings, many of which the state will subsequently lease back. The sales are projected to generate more than $1 billion, the sources said.

Some of the deficit would be wiped out on paper but could quickly rematerialize. Legislators have said they will fill $1.4 billion of the budget gap by replacing the administration’s revenue projections with those of the state’s nonpartisan Legislative Analyst’s Office, which are more optimistic.

Billions more of the deficit would be handled with expectations of financial help from Washington, but the state has no control over whether those funds will arrive. More than $3 billion more would be borrowed from other state funds.

Friday’s handshake agreement came on Day 93 of the fiscal year.

“Nobody’s celebrating here,” Steinberg said.

shane.goldmacher@latimes.com