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Gov. Arnold Schwarzenegger and legislative leaders announced Monday that they had reached a deal to close California's $26.3-billion deficit and begin paying all of the state's bills again, potentially ending months of partisan wrangling and a cash crisis that threatens to push California into insolvency.
Their agreement, which could go before the full Legislature within days, does not include any broad-based tax increases, relying instead on deep cuts in government services, borrowing and accounting maneuvers to wipe out the deficit.
The plan has not been formally released. But as outlined by lawmakers and their staffs, the proposal would reshape some aspects of government in California, significantly scaling back many services that have been offered to residents -- particularly the elderly and the poor -- for years.
Tens of thousands of seniors and children would lose access to healthcare, local governments would sacrifice several billion dollars in state assistance this year and thousands of convicted criminals could serve less time in state prison. Welfare checks would go to fewer residents, state workers would be forced to continue to take unpaid days off and new drilling for oil would be permitted off the Santa Barbara coast.
"We've accomplished a lot in this budget," said Gov. Arnold Schwarzenegger, as he emerged from his office with legislative leaders shortly before 7 p.m. to announce the deal, after an all-day negotiating session of the "big five" -- the governor and legislative leaders.
"It was like a suspense movie, but . . . we have accomplished a lot," the governor said. "This is a budget that will have no tax increases, a budget that is cutting spending. . . . We're also very happy that in this budget we make government more efficient."
Democrats, who initially sought tax increases, said they had managed to ward off cuts proposed earlier by Republicans that would have been catastrophic to the state's social safety net.
"We have cut in many areas that matter to real people, but I think we have done so responsibly," said Senate leader Darrell Steinberg (D-Sacramento). "This is a sober time."
It is not clear whether the package will pass when lawmakers vote on it, perhaps Thursday. Concern that it could unravel as interest groups catch wind of its contents and pressure the rank-and-file to vote it down was evident in legislative staffers' reluctance to share some details.
No one involved in the negotiations would explain how $1.2 billion would be cut from the state prison system. Law enforcement advocacy groups said that level of reduced spending could require the release of as many as 20,000 prisoners before their sentences are complete.
It is also unclear how long the proposal would keep the state's budget balanced. The plan is full of expense deferrals, one-time measures and assumptions that invite a deficit to reemerge.
The governor and lawmakers assumed the privatization of the State Compensation Insurance Fund would generate $1 billion, for example, but few, if any, experts believe such a sale is possible this year. And the plan would save $1.2 billion by waiting until a new fiscal year begins before sending out one scheduled batch of paychecks to state workers, a clear accounting scheme.
Further, finance officials say the continued plunge of tax revenues could bring on another shortfall before year's end.
"There will be more work to be done," said Assembly GOP Leader Sam Blakeslee (R-San Luis Obispo). "The recession is not over."
Monday night's compromise followed weeks of meetings in the governor's office and comes amid one of the worst cash crises in state history.
Finance officials have been sending out hundreds of millions of dollars in IOUs because the state does not have enough cash to pay all of its bills; it is only the second time that has happened since the Great Depression. California's credit rating has dropped to its lowest level in many years, teetering just above junk status. State Treasurer Bill Lockyer has warned that failure to put a budget in place quickly could hurt California's standing on Wall Street so much that it would be unable to access the cash it needs to build schools and roads.
The budget package, according to those who worked on it, is expected to hit local governments particularly hard. It would raid municipal funds for $1.9 billion, mostly county money. The funds must be paid back, with interest, in three years. But local leaders say they need the money now, having endured their own excruciating budget cuts triggered by steep declines in local tax receipts. They say Sacramento's reductions will force them to slash the services they provide, adding more pain on top of the state cutbacks.
Cities and counties would lose another $1 billion in transportation money under the proposal, and the state is also seeking at least $1.7 billion -- and possibly billions more -- from local redevelopment agencies. Lawmakers will also be given the option to greenlight a controversial plan that would give some local redevelopment agencies broad new discretion to tear down and rebuild neighborhoods under their jurisdiction for decades to come, regardless of whether those areas are blighted.
"It's bad public policy and it is going to hurt a lot of people," Los Angeles County Supervisor Zev Yaroslavsky said of the budget plan.
Education would also lose billions of dollars, although the deal skirts suspension of voter-approved funding formulas. Schools are expected to have to increase the number of students in classes, lay off teachers and scale back their offerings. Education lobbyists won a provision that requires the state to ultimately pay back money it is cutting, but districts are struggling now.
Fees at the state's universities were already raised in anticipation of the deal. The number of students admitted would be reduced by thousands. And university employees are facing unpaid furloughs. They would join California's 230,000-plus state workers who will continue to be forced to take off three unpaid days per month through June 2010.
The furloughs equate to roughly a 14% pay cut for state employees. California's largest public employee union, angered by the furloughs, is currently polling its membership about a strike.
Advocates said the cuts to healthcare and social services -- while scaled back from what the governor originally proposed -- would be devastating.
"Millions of Californians will live sicker and die younger as a result of these cuts," said Anthony Wright, executive director of the nonprofit Health Access California. He called the plan a cause for "embarrassment and shame for California."
Work requirements under the state's welfare program would be increased, forcing many recipients to drop out. Emergency cash grants intended for the children of families not meeting those requirements would be eliminated for the first time. Entire groups of seniors currently eligible to receive healthcare in their homes no longer would be. Those that are eligible would be fingerprinted, an effort to eliminate fraud.
Other changes in the budget are more symbolic.
Legislative leaders agreed to a Schwarzenegger demand to eliminate the state Integrated Waste Management Board, long known as the home of six-figure-salaried political appointees, including three ex-lawmakers currently serving. The board's functions -- minus the high-paid appointees -- will continue.
Times staff writers Molly Hennessy-Fiske, Patrick McGreevy and Michael Rothfeld contributed to this report.