Legislature Fails to Agree on Governor’s Fiscal Proposals

Gov. Arnold Schwarzenegger acknowledged late Friday that the Legislature would probably not approve a pair of financial recovery proposals that he had hoped to place on the March ballot.

In a succession of votes, Senate Republicans and Democrats took turns shooting down the governor’s plan and a Democratic alternative to borrow as much as $15 billion to patch a gaping hole in the state budget and prevent future fiscal crises.

The Senate adjourned for the week about 9:40 p.m. Debate continued in the Assembly.

GOP senators who met with the governor afterward emerged to say he was very disappointed.

Republicans and Democrats blamed each other for the failure to reach a deal.

The governor defined lawmakers as “overspending addicts during his campaign,” said Rob Stutzman, Schwarzenegger’s director of communications. “And as overspending addicts, they’ve been unable to bring themselves to a place tonight where they can truly recognize the ways of their overspending and reform themselves.”

Senate President Pro Tem John Burton (D-San Francisco) and Senate Republican Leader Jim Brulte (R-Rancho Cucamonga) exchanged barbs on the Senate floor when Brulte threatened to put an even tougher constitutional spending cap before voters next November.

“The governor bent over backwards to try to meet you halfway,” Brulte said.

“Halfway?” Burton responded. “Bending over backwards? You must have been in a different meeting than I was at.”

Stutzman also suggested that the governor would turn to voters in November and request that they approve a ballot measure containing an even tougher constitutional spending cap.

But California will run into significant trouble long before then: If some kind of bond proposal is not approved by voters in March, the state could run out of cash in June, when $14 billion in short-term loans obtained last year is due.

Aware of this possibility, the Schwarzenegger administration took steps Friday to proceed with an existing $10.7-billion bond issue that was approved by lawmakers last summer but has been challenged in court as unconstitutional.

All of this had Wall Street financial experts reacting nervously Friday even before the governor’s plan went down to defeat. California’s credit rating is at the lowest level of any state, and the firms that buy, sell or back state securities have repeatedly warned that fiscal conditions must soon improve.

Shortly before 8 p.m., the governor’s proposal to borrow $15 billion was defeated in a Senate floor vote. The plan got only five votes, all from Democrats; all but one of the 15 Republicans abstained because of a lack of support for the governor’s spending cap. There were 14 votes against the governor’s proposal: those of 13 Democrats and Sen. Tom McClintock (R-Thousand Oaks).

The Democratic counterproposal also failed, receiving 23 Democratic votes -- four short of the 27 required for two-thirds approval. McClintock voted against it, and the other Republicans abstained. Later, Senate Republicans changed their votes to send the governor’s spending limit to a 34-0 defeat, accompanied by a vow that they would put an even tougher cap on the November ballot.

The Assembly Budget Committee also rejected Schwarzenegger’s proposals.

“Inflammatory threats are nonproductive,” said Assemblyman Mark Leno (D-San Francisco), responding to Stutzman’s tough rhetoric. “We are working long and hard to help the governor reach his goals.”

The sticking point in a frenetic day of maneuvering was Schwarzenegger’s call for the cap. His measure had been embraced by Republicans as essential to California’s recovery but rejected by Democrats as a recipe for devastating cuts in government programs.

Schwarzenegger and senior administration officials met with legislative leaders in an effort to break the impasse over the cap, which the governor tied to his proposal to borrow as much as $15 billion. But by the afternoon, “the talking stopped,” Stutzman said.

Schwarzenegger had asked lawmakers to approve both proposals by midnight to meet the secretary of state’s deadline for placing measures on the March ballot so voters could decide on the constitutional amendments. Officials have acknowledged, however, that the deadline may be flexible.

Shortly before 5 p.m., in the day’s first vote, the Assembly Budget Committee approved a Democratic alternative spending cap. It would create a reserve fund that the state could tap when tax collections fell in a bad economy. Democrats offered the measure as a substitute for Schwarzenegger’s more rigid spending cap, but Republicans said the proposal was not strict enough to curb expenditures.

The measure passed with 16 Democratic votes and none from Republicans. Democrats hold majorities in both houses, but need some Republicans to join them to reach the two-thirds majority required for passing potential constitutional amendments.

A Democratic substitute for Schwarzenegger’s bond plan was also approved 16 to 10, again without a single GOP vote. A number of Republicans said they preferred the Democratic plan because it called for a shorter financing term but they voted against it because it wasn’t linked to the GOP spending cap.

“I’d rather have your bond with the governor’s spending limit,” said Assemblyman Ray Haynes (R-Murrieta).

Both measures required approval from other Assembly committees.

Democrats and a number of Republicans have criticized the governor’s bid to borrow as much as $15 billion and repay it over as long as 30 years. The Democratic plan would borrow the same amount over no more than seven years and divert the proceeds of an existing half-cent sales tax to repayment of the bonds.

That would cut interest payments by billions of dollars over the life of the bond issue.

In a move criticized by some Democrats, Schwarzenegger left the Capitol for about two hours in the middle of the day to rally support for his plan at a campaign-style event in Tracy, about an hour from Sacramento.

During his campaign for governor, he promised to end Sacramento “politics as usual.” But at the rally and in several conservative talk-radio interviews before and after, he engaged in political activities, promoting his “California recovery bond” and a “never again” spending limit.

“What we want to do is, we want to take away the state’s credit card from the politicians, and cut it in half, and throw it in the garbage can so they can never do that again,” Schwarzenegger said in an 8:15 a.m. telephone interview with the Rick Roberts Show in San Diego. “We want to have a balanced budget once and for all.”

Schwarzenegger’s efforts to craft a compromise began about 8:45 a.m. He met with Brulte, a harsh critic of the Democratic cap proposal.

Later in the morning, the governor sat down with Burton, the Legislature’s most powerful Democrat. Schwarzenegger met separately with Assembly Speaker Herb Wesson (D-Culver City) and Assembly Republican Leader Dave Cox of Fair Oaks.

Meanwhile, budget experts for Burton and Brulte huddled with the governor’s finance staff in a search of common ground.

At times, Friday’s discussions echoed the partisan rancor of budget debates earlier this year. Burton was less strident than many principals but voiced pessimism about the prospects of an agreement.

“I don’t see how. Time is running out,” he said late in the afternoon.

He added that the governor might have had more success if he had remained in the Capitol to negotiate, in part because “it’s clear that sitting in meetings with him, he can take control of the ideologues.”

Speaker Wesson said the governor had given lawmakers too little time to fashion a deal when “what we are talking about is significant changes to the Constitution.”

In an effort to break the impasse, Schwarzenegger had asked Republicans to meet one Democratic concern by showing more flexibility on how to determine the spending baseline for a cap, said Republican Assembly leader Cox.

In a bipartisan gesture earlier in the day, the Legislative Women’s Caucus -- one of many informal subgroups that includes Republicans and Democrats -- held a news conference to announce agreement on two points: a bond measure “with as short a term as possible” and a “spending limit measure which includes a reserve, so that, in good times, the reserve may be used to reinvest in California’s future.”

Assemblywoman Hannah-Beth Jackson (D-Santa Barbara) said the caucus agreement had arisen from discussions over coffee Friday morning in the members’ lounge.

The spending limits proposed by Schwarzenegger and Democratic lawmakers both involve setting aside money in a reserve when state revenues are robust.

In Schwarzenegger’s plan, the reserve could be used only to provide tax rebates, pay debt service on deficit bonds, cover past revenue shortfalls or finance emergencies decreed by the governor with legislative consent. The Democratic plan does not specify priorities for spending a reserve.

In one of the day’s most overtly partisan displays, Sen. Rico Oller (R-San Andreas), a candidate for Congress, distributed baseball caps emblazoned with the words “Democrat Spending Cap” and with a hole cut in the top. Before the Senate convened at noon, Oller passed the caps out on the Senate floor and mugged for news cameras.

As the potential for a Schwarzenegger setback loomed, Brulte reacted with irritation to questions about whether the governor should be at the rally in Tracy.

“The governor should be doing exactly what he is doing,” he said. “Let me tell you what is wrong with places like this.

“What is wrong is having the Democratic speaker of the Assembly tell the governor of California there is no need for us to get together the next couple of days -- let me meet with colleagues,” he said. “And then go on TV Wednesday and criticize the governor for not getting together with him. That is what is wrong with this place: saying one thing privately and doing something else publicly.”

Schwarzenegger had still been making efforts to build relationships, even as he campaigned for his proposal.

Times staff writers Joe Mathews and Dan Morain contributed to this report.