Federal stimulus deal and state budget solution ready for votes

By Evan Halper and Patrick McGreevy

Feb. 12, 2009 12 AM PT

SACRAMENTO —

Gov. Arnold Schwarzenegger and legislative leaders are planning to scale back the state’s investment in schools, higher education, public transportation and other programs -- while imposing several temporary tax increases -- to close the $42-billion budget gap projected by the middle of next year.

The bipartisan plan was cobbled together in private talks by legislative leaders and presented to rank-and-file lawmakers Wednesday afternoon, according to participants. Votes in the Assembly and state Senate are planned as soon as Friday. It is unclear whether the required two-thirds of legislators will support the proposal.

Senate Leader Darrell Steinberg (D-Sacramento) called the plan “a common framework” for a deal that would balance the state budget for the next 17 months.

Matt David, Schwarzenegger’s communications director, characterized any remaining issues to be worked out as “minor.”

A copy of the fiscal blueprint obtained by The Times shows that the deficit would be wiped out with $15 billion in cuts; $14.4 billion in new and increased taxes on sales, vehicles, gasoline and personal income; $12 billion in borrowing against future profits from the lottery; short-term loans; and various accounting maneuvers.

Some of the cuts and borrowing could ultimately be offset by billions of dollars in federal aid that California would receive in the economic stimulus package that passed the U.S. Senate this week and is awaiting final approval in Congress.

The fashioning of the budget framework follows months of deadlock in the Capitol. The governor called lawmakers into emergency session to address a spiraling deficit in November, after state revenues plummeted along with financial markets and it became clear the state could run short of cash.

This month, tax refunds were suspended, along with payments to vendors and some welfare and college grants. And now much of state government is shutting down two days a month, furloughing most employees without pay.

Under the new budget agreement, cuts to other state services would be deep and long-lasting.

Schools and community colleges, which account for nearly half of all state spending, would lose nearly $8 billion. Only part of that would be backfilled by Washington. Several state requirements on how schools allocate their money -- including on class size reduction -- would be suspended for several years.

School officials say the plan could lead to the elimination of after-school activities, elective classes such as art and music, classroom supplies and thousands of teaching jobs.

Kevin Gordon, a lobbyist for school districts, said, “For the first time, people are really going to see tangible negative impacts from cuts.”

State colleges and universities, where tuition has been steadily rising for years, would lose $890 million.

Scheduled cost-of-living increases for public-assistance recipients would be canceled, and mental health and early childhood education programs created by voter-approved ballot initiatives would be cut by over $830 million. The state would cut spending on local public transit by $459 million.

Jeff Wagner, a spokesman for the California Transit Assn., warned that such a big hit could mean fare hikes and service reductions. Transit agencies, he said, have “been cut to the bone already.”

Californians would also take a substantial hit to their wallets.

Vehicle license fees would nearly double, going from the current rate of 0.65% to 1.15% of the value of a car or truck. The sales tax would increase by 1 cent, raising the rate in Los Angeles County to 9.75%. Gasoline taxes would increase by 12 cents a gallon. And residents would pay a new surcharge on personal income taxes, amounting to 2.5% to 5% of their total tax bills, depending on how much federal money California gets.

The new and increased taxes would remain in effect for at least two years. If voters approved constitutional spending restraints that the Legislature would put on the ballot in the coming months as part of the budget package, the taxes would remain in place for five years.

The budget deal was negotiated almost entirely in secret. Rank-and-file lawmakers still have not seen legislation containing the package of cuts and tax increases their leaders expect them to approve this week.

Lobbyists and other advocates immediately began pressuring lawmakers to resist the plan.

Anthony Wright, executive director of the nonprofit Health Access California, said the spending limits would strangle government healthcare programs. The cost of providing care to the poor, he said, is likely to grow much faster than state spending would be allowed to under such limits.

“This is going to devastate healthcare,” he said.

Public employee unions were also angered by the deal, which eliminates two unspecified state holidays currently allotted to government workers. Such givebacks are typically negotiated in collective bargaining with the governor. But in this case, the days off would be taken away without workers being able to negotiate anything in return.

Republican legislative leaders fought for and won a major corporate tax break as part of the spending plan. It would allow some large companies to change how they compute their state taxes to save potentially millions of dollars over the course of several years. Instead of being taxed on a formula that factors in how much California property they own, the size of their payroll and their overall sales, they could elect to be taxed on sales only.

Champions of the tax break, projected to deprive state coffers of $690 million a year, say it will create jobs because the current tax formula penalizes companies with facilities and workers in the state. They point to a large facility that the biotech company Genentech says it built in Oregon instead of California for that reason.

Advocates for the poor call the proposal a giveaway.

“A bunch of states have done this, and it hasn’t created any new jobs or any new investment,” said Lenny Goldberg, executive director of the Sacramento-based California Tax Reform Assn. “It just allows companies to avoid paying taxes.”

Film companies would get tax breaks totaling $100 million annually to keep their productions in California, an incentive the movie-star governor has been trying to put in place for years.

The budget blueprint also includes the relaxation of environmental laws on some major highway projects, openings for private companies to take over some public-works construction and a tax credit for new hires -- all demanded by the Republican leaders, Assemblyman Mike Villines of Clovis and Sen. Dave Cogdill of Modesto, in exchange for supporting the temporary tax hikes.

Pressure on GOP lawmakers to vote against the plan is intense, and it remains unclear whether the proposal will win the three Republican votes required for passage in the Assembly and in the Senate. Even more Republicans would be needed if the plan did not get the vote of every Democrat in the Legislature.

“I do not believe there are enough Republican votes in the state Senate to pass the budget at this time,” said Sen. Sam Aanestad (R-Grass Valley), who said he plans to vote against it. “But a lot can change in two days.”

Cogdill, a participant in the talks, said he had “negotiated it to the point where I think it doesn’t get any better.”

evan.halper@latimes.com

patrick.mcgreevy@ latimes.com

(BEGIN TEXT OF INFOBOX)

Bipartisan plan

The blueprint for a state budget deal includes:

TEMPORARY TAX HIKES

* Nearly doubling vehicle license fee

* Raising sales taxes 1 cent

* Raising gasoline taxes 12 cents a gallon

* Surcharge of 2.5% to 5% on personal income taxes

PROGRAM CUTS