Compromise Budget OKd on 27-10 State Senate Vote

Breaking an impasse that pushed state government to the brink of financial ruin, the California Senate voted 27 to 10 Sunday to approve a compromise budget that cuts programs, raises fees and borrows billions of dollars.

However, in their struggle to resolve a $38.2-billion shortfall -- the nation’s largest state budget gap -- lawmakers were resigned to a plan that will see a $7.9-billion deficit appear in 2004-05. There remains an imbalance between spending and revenue.

The measure now moves to the Assembly, where passage is uncertain because of the deep ideological divisions that separate the larger chamber’s 80 members. If it clears that hurdle, however, Gov. Gray Davis has signaled that he would sign the bill.

For months, the state’s financial standing steadily declined as lawmakers argued -- Democrats refusing to make severe program cuts, Republicans saying they would never vote to raise taxes. The deadlock was further complicated by a recall drive that now has Davis facing an election Oct. 7. The budget the Senate approved gave something to both sides.

“Do I like this budget?” Senate Republican Leader Jim Brulte of Rancho Cucamonga asked just before the vote Sunday night. “Absolutely not. But I do not believe a $38-billion budget shortfall that was created over three years could be eliminated in one year.”

Since announcing the compromise late last week, Brulte and Senate President Pro Tem John Burton (D-San Francisco) had expressed confidence that they would have the necessary votes of at least two-thirds of the membership. In the end, they got exactly the number they needed.

“This is not a budget to be proud of, except for the fact that the people of the state expect a budget to be passed,” Burton said. “They expect bills to be paid. And this does that.”

The compromise comes nearly a month after the start of the new fiscal year and six weeks after the Legislature missed its constitutional deadline for adopting a spending plan.

In the Assembly, opponents will have little room to maneuver. Senators prepared to head home for recess after Sunday night’s vote, and time for crafting a different budget deal is running out. Local schools are faced with not having the money they need to open in the fall, and cash for major transportation projects will soon stop flowing.

Democrats in the Senate, who hold a 25-15 majority, were confident that they could pass a budget by capturing at least two GOP votes. But five Republicans approved the plan, countering the two Democrats who did not vote and one who was absent.

Some lawmakers said that the larger bipartisan outcome will make it harder for Assembly Republicans to not follow suit.

Senate Democrats also warned their fellow party members in the Assembly not to seek more taxes.

“With the recall now qualifying, it would do no one any good to hold out,” said Sen. Don Perata (D-Oakland), who voted in favor of the budget. “We were at a complete standoff. They weren’t moving any further, we weren’t moving any further. Every day the budget was delayed hurt Davis. If the Assembly delays it, they’re tightening the noose.”

The budget shaped by the Senate was by all accounts a rush job. Staff members were still working on the bill through the weekend, and many of the lawmakers barely had a chance to review the cuts they were expected to vote on.

Legislative leaders kept it that way deliberately. They wanted to avoid giving lobbyists the opportunity to persuade lawmakers not to vote for the spending plan. There was plenty in the bill for many groups to dislike.

Some Republicans railed against the plan for relying on borrowing and a $4-billion vehicle license fee, or car tax, hike that the state Department of Finance enacted by administrative order earlier this year.

“The budget now before us is a rotting porch just waiting to collapse,” said Sen. Tom McClintock (R-Thousand Oaks), who voted against the plan. “It rests on two decayed pillars that cannot stand: the illegal tripling of the car tax and the illegal borrowing of billions of dollars.”

Republicans, including those who voted for the budget, are plaintiffs in a lawsuit to invalidate the car tax increase. If they prevail in court, the state will have to give back all the money collected from the increased tax.

“If you pass a budget that spends this money, you will have blown a multibillion-dollar hole in future budgets,” McClintock said. “Mark my words: This budget solves nothing.... The day that it is signed will be the first day of the budget crisis of 2004.”

Brulte said there is always a “could’ve, should’ve, would’ve crowd” pushing to hold out for more, but this was the best deal Republicans were going to get.

“As long as the rules say it takes 27 [votes], it takes bipartisan cooperation, I think this is the best that could be done,” Brulte said.

The plan includes at least $14 billion in new borrowing. By taking on additional debt, the state would continue spending far more than it collects in tax revenue. The largest component of the new debt involves rolling over $10.7 billion of the deficit into the next five years.

Some cities are troubled by a complex tax swap that would be used to pay off the deficit bonds, and which they say could disrupt their finances for years. It involves the state taking away a half cent of sales tax that currently goes to local governments and using it instead to pay off deficit bonds.

Local governments would be reimbursed with an equivalent share of property tax revenue, but cities heavily dependent on “big box” stores to generate revenue for services such as police and fire protection could suffer a loss. The tax swap comes on top of $1.1 billion in straight-out cuts to cities and counties.

The budget bill also calls for borrowing $1.9 billion to make the annual contribution to the pension funds of state workers. Taking on debt to pay such a routine operating expense has raised red flags among Wall Street finance and securities firms that lend the state money and sell its bonds to investors.

Also raising concern on Wall Street is the budget’s assumption that $1.5 billion can be raised by borrowing against tobacco company money that the state receives from anti-smoking settlement payments due in the future.

The rating agency Standard & Poor’s last week cut California’s standing to the lowest level of any state -- dropping three rating steps from A to BBB -- because lawmakers failed to address an ongoing structural imbalance between what the state spends and what it takes in. The sharp downgrade is expected to cost the state hundreds of millions of dollars in higher interest expenses.

Yet the borrowing wasn’t the only part of the budget that attracted critics.

Health-care advocates were troubled by a 5% cut in rates paid to doctors who treat Medi-Cal patients, which will last for at least three years.

And they warned that the failure of lawmakers to raise taxes beyond the recent tripling of the vehicle license fee by the Davis administration means things will only get worse next year.

“By not raising revenues, we just postponed the worst of cuts for next year’s budget crisis,” said Anthony Wright, executive director of Health Access California, a group that advocates health care for the poor.

The state prison system, which Gov. Gray Davis had sought to spare from cuts, would see a $120-million reduction. The savings would be achieved by sending some nonviolent inmates to residential drug treatment programs, expanding education programs that give inmates credit toward early release and sending fewer parole violators back to prison.

Despite Republican vows to fight them, the budget also includes significant fee hikes. Polluting the air and water will cost businesses more, as will using pesticides, building a power plant, mining and logging.

The cost of attending community college will go from $11 to $18 per credit.

And public university students have already seen their tuition go up by nearly a third. Local schools were spared further cuts beyond what they had already endured earlier in the year.

Per student funding will remain roughly the same as it has been.

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Budget bill highlights

By a 27-10 vote, the state Senate passed a $70.8-billion general fund budget Sunday, and will send it to the Assembly today. The plan, AB 1765, contains spending cuts and fee increases and leaves a projected $7.9-billion deficit in 2004-05:

Spending cuts:

Schools

* Rejects proposed Republican cuts in kindergarten.

* Keeps per pupil spending at about the same level when federal funds are included.

Higher Education

* Community colleges increase student fees from $11 to $18 per unit.

* University of California increases student fees as much as 30%.

* California State University increases student fees 30%.

Prison System

* Cuts $120 million by diverting nonviolent inmates to residential drug treatment programs, expands some education programs, develop alternatives to returning parole violators to prison.

Aged, Blind and Disabled

* Eliminates January cost of living increases.

Health Care

* Medi-Cal makes 5% reduction in payments to physicians, pharmacies and managed care plans; retains optional benefits but imposes cost containment for dental care and hearing aid benefits.

Mental Health

* 5% reduction in rates paid to mental health managed care plans.

Revenues and fees:

* Vehicle license fees -- $4-billion increase through administrative order.

* Deficit bonds -- $10.7 billion through borrowing.

* Pension bonds -- $1.9 billion through borrowing.

* Tobacco bonds -- $1.5 billion through borrowing.

* Sales and property tax swap with local governments -- $2.3 billion annually for five years to repay deficit bonds.

* Fee increases for motor vehicles, court filings, others; permits for air pollution, water pollution and pesticide use; workers compensation program.

Assumptions:

* That the state will win lawsuits threatened against the vehicle license fee hike and pension obligation bond borrowing.

* Indian casinos will give the state $680 million.

* State employees will take a $1-billion pay cut.

Source: Senate Republican Caucus

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How they voted

Republicans

* Aanestad, Sam

(Grass Valley) No

* Ackerman, Richard (Irvine) No

* Ashburn, Roy (Bakersfield) Yes

* Battin, Jim (La Quinta) No

* Brulte, Jim

(Rancho Cucamonga) Yes

* Denham, Jeff (Salinas) No

* Hollingsworth, Dennis

(Murrieta) No

* Johnson, Ross (Irvine) Yes

* Knight, William “Pete” (Palmdale) Yes

* Margett, Bob (Arcadia) No

* McClintock, Tom

(Thousand Oaks) No

* McPherson, Bruce

(Santa Cruz) Yes

* Morrow, Bill (Oceanside) No

* Oller, Rico (San Andreas) No

* Poochigian, Chuck (Fresno) No

Democrats

* Alarcon, Richard (Sylmar) PNV*

* Alpert, Dede (San Diego) Yes

* Bowen, Debra

(Marina del Rey) Yes

* Burton, John

(San Francisco) Yes

* Cedillo, Gil (Los Angeles) Yes

* Chesbro, Wes (Arcata) Yes

* Ducheny, Denise(San Diego) Yes

* Dunn, Joe (Santa Ana) Yes

* Escutia, Martha (Whittier) Yes

* Figueroa, Liz (Fremont) Yes

* Florez, Dean (Shafter) Yes

* Karnette, Betty

(Long Beach) Yes

* Kuehl, Sheila

(Santa Monica) Yes

* Machado, Mike (Linden) Yes

* Murray, Kevin (Culver City) Yes

* Ortiz, Deborah

(Sacramento) Yes

* Perata, Don (Alameda) Yes

* Romero, Gloria

(Los Angeles) Yes

* Scott, Jack (Altadena) Yes

* Sher, Byron (-Stanford) Yes

* Soto, Nell (Pomona) PNV*

* Speier, Jackie

(Hillsborough) Yes

* Torlakson, Tom (Antioch) Yes

* Vasconcellos, John

(Santa Clara) A**

* Vincent, Edward

(Inglewood) Yes

*PNV -- present, not voting.

**A -- absent

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Voices on the budget bill

‘It was felt by a majority of our party, it was felt by the Republican leadership, that it’s important for us to do a job, even if it’s distasteful. And this one is about as distasteful as any budget I’ve been called to vote upon.’ Senate President Pro Tem John Burton (D-San Francisco)

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‘Today I tell you this: The budget now before us is a rotting porch, just waiting to collapse. It rests on two decayed pillars that cannot stand: the illegal tripling of the car tax and the illegal borrowing of billions of dollars for ongoing expenses without a vote of the people.’ Sen. Tom McClintock (R-Thousand Oaks)

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‘I rise to support this budget, not because I like it. In fact I don’t. . .I’m going to vote for this budget because I actually think it’s the best we can do.’ Senate Minority Leader Jim Brulte (R-Rancho Cucamonga)

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Times staff writers Peter Nicholas and Jeffrey L. Rabin contributed to this report.