State lawmakers blew past a constitutional deadline to pass a budget Tuesday, as Gov. Arnold Schwarzenegger and the Democrats who control the Legislature remain far apart on how to solve California's estimated $19.1-billion deficit.
With two weeks left until the new fiscal year begins, the prospect of yet another late budget could again harm California's standing with Wall Street ratings agencies, costing the state millions. A lame-duck governor demanding a major pension overhaul, an enormous shortfall and an already heated campaign season could prove to be a recipe for a prolonged stalemate.
To balance the budget, Schwarzenegger has proposed no new taxes and seeks deep cuts in state services, including the wholesale elimination of welfare, which would make California the only state without such a program. Democrats have countered with two plans, one that includes a bevy of tax increases, the other a massive borrowing scheme to be paid back through a new tax on oil pumped from the ground in the state.
"There is no debate that the worst thing you can do is nothing," Controller John Chiang, who manages the state's bills, said in a letter to state leaders earlier this month. "Political paralysis cannot be an option."
Yet talks to bridge the budget divide remain in their infancy. The Legislature's four leaders -- two of whom will be in their first budget negotiation as leaders -- and Schwarzenegger met face-to-face for the first time on Monday evening, the eve of the deadline.
The missed deadline -- ignored for the 23rd time in 24 years -- was not unexpected. Late budgets have become the norm in Sacramento, and most state bills will be paid after the new fiscal year begins July 1, relieving pressure to craft an on-time spending plan.
"If you do something bad and you never get punished for it, then you don't see it as being bad anymore," said Mike Genest, a former Schwarzenegger budget director.
The task before Sacramento is daunting; the general fund deficit is equivalent to one-fifth of the budget. A joint budget committee of 10 lawmakers from the state Assembly and Senate has been meeting daily to draft the Legislature's spending blueprint, but its members have held off on the hardest choices -- namely how much in taxes to count on.
"We're trying to focus on a budget that begins setting the state on a more solid fiscal course," Senate President Pro Tem Darrell Steinberg (D-Sacramento) said. Senate Democrats have proposed nearly $5 billion in taxes on business, vehicles, alcohol and income to plug one-quarter of the deficit. "Enough is enough when it comes to the bloodletting" of state programs, he said.
Republican lawmakers, who favor the governor's plan, have objected. Senate GOP leader Dennis Hollingsworth of Murrieta accused Democrats of a "pretty strong resistance to dealing with reality." Some GOP support will be necessary to pass a spending plan.
California's battered economy is not expected to make the job any easier. An economic forecast by the UCLA Anderson School of Business released Tuesday predicted a sluggish recovery, with unemployment above 10% in the state until 2012.
Assembly Speaker John A. Perez (D-Los Angeles) has pitched his plan, which would rely on $9 billion in borrowing that would eventually be repaid through a new tax on oil extraction, as saving hundreds of thousands of service worker and teacher jobs.
Schwarzenegger called the Perez proposal "illegal" Tuesday, stressing his support only for a budget without new taxes that includes a pensions fix.
Meanwhile, the fall elections loom, and nervous lawmakers are unlikely to voluntarily inflict the type of pain -- cuts, taxes or both -- a balanced budget would require. The last election year, 2008, brought the tardiest budget in state history, 93 days late.
Such a protracted standoff will bring headlines about the "the daily drip of dysfunction" in Sacramento, warned Tom Dresslar, a spokesman for Treasurer Bill Lockyer. In turn, Wall Street could downgrade the state's credit rating, which Standard and Poor's warned this month is "at risk from a stalemated negotiation." Any further downgrade would pile millions more on California's already high borrowing costs, Dresslar said.