State budget plan fails to pass Senate; impasse may set record

ASSOCIATED PRESS
Saturday, August 30, 2008

By DON THOMPSON

SACRAMENTO -- The state Senate on Friday rejected a spending plan similar to the one presented last week by Gov. Arnold Schwarzenegger, pushing the state closer to a modern-day record for a budget impasse.

The budget bill failed 24-15 on a party-line vote after it did not gain the two GOP votes needed to reach a two-thirds majority. Sen. Lou Correa, D-Anaheim, abstained.

Among other issues, Democrats and Republicans disagree over whether to raise the state's sales tax temporarily, which the Republican governor has proposed.

The Senate's leader, Democrat Don Perata of Oakland, said majority Democrats gave Schwarzenegger nearly everything he wanted and that it is now up to Republicans to offer an alternative budget.

"The governor wanted budget reform to limit spending. He gets it. The governor wanted a sales tax increase. He gets it. The governor wanted deeper cuts . . . he gets it," Perata said. "The only demand we did not give the governor is the tax break -- the tax cut after the temporary tax expires."

Friday's action marked the second time a budget bill has been brought to a full vote in the Legislature since the start of the fiscal year.

Earlier this month, the Assembly rejected a Democratic spending plan that called for raising $6.6 billion through tax increases on the wealthy and corporations. It also failed to receive any Republican support.

California is the only state with a fiscal year beginning July 1 that still does not have an approved spending plan, and there is little hope a compromise will be reached anytime soon.

Lack of a budget means some state programs will not be funded.

The state cannot make payments to the three systems of higher education, Cal-Grants for student aid, some public school programs, Medi-Cal, mental health programs and payments to vendors who provide a wide array of services.

If the impasse drags on, the state eventually will be forced to take out loans to fill the gaps, a move state finance officials say will only make matters worse by costing hundreds of millions of dollars in interest and borrowing fees.

Last week, Schwarzenegger released what he described as a compromise plan to close the state's $15.2 billion deficit.

He called for a temporary 1 percent sales tax increase that would dip a quarter percent below the current level after three years. It would generate $4 billion in the current fiscal year and slightly more in the following two years before the sales tax would be reduced permanently.

Schwarzenegger also called for nearly $10 billion in cuts, creation of a rainy-day fund to be tapped only during lean budget years and giving the governor authority to cut spending in the middle of the fiscal year when revenues are sliding.

Under the version presented Friday in the Senate, the state would make virtually all the spending cuts Schwarzenegger sought but would forgo the sales tax rollback. Instead, the sales tax would return to its current level after three years.

Republicans criticized the tax increase, noting rising unemployment and a souring economy.

"A tax increase right now during this fragile time in the California economy should be the last thing we do, not the first thing we do," said Sen. Bob Dutton, R-Rancho Cucamonga.

Schwarzenegger praised Democrats for bringing the plan to a vote but noted that it was missing key elements of his compromise plan. "I think that the Senate is doing something very courageous today," he said after a budget-related event in San Diego on Friday. "Everyone has to recognize that we all have to go through this painful thing and do things that we normally don't want to do."

The latest the Legislature previously has gone before approving a budget was in 2002, when it passed a spending plan on Aug. 31.

This year's impasse is almost certain to go longer, with Republicans and Democrats remaining far apart on how to deal with the deficit. Lawmakers acknowledged frustration over the deadlock.

"Here we are on Day 60 of an impasse in California ... and people look to the state Capitol and wonder, 'What are those people doing?"' said Sen. Roy Ashburn, R-Bakersfield.

California is one of just a few states to require a two-thirds majority to pass a spending plan, a threshold that has been especially difficult to meet this year.

No plan offered by the Democrats or Schwarzenegger has been able to get support from the required two Republican senators or six Republican Assembly members.

With Democrats and Schwarzenegger agreeing to roughly $10 billion in spending cuts, the debate has centered on how to close the remaining $5 billion deficit.

Democrats and Schwarzenegger say it must be done through some type of additional revenue. That mix of cuts and taxes appeals to a plurality of Californians, according to a poll released this week by the Public Policy Institute of California. The survey found that approach favored by 41 percent of state residents, compared to 35 percent who favored only spending cuts.

Republicans oppose tax increases but have yet to detail what further cuts they would make to close the rest of the deficit. On Friday, Perata challenged them to do so and deliver their own budget bill to the Senate.

Time also is running out for the long-term reforms Schwarzenegger wants as part of any budget deal. Gaining the unilateral authority to make midyear cuts or creating a substantial rainy day fund will require voter approval, but it's doubtful whether the Legislature has any more time to place measures on the Nov. 4 ballot.

On Friday, Secretary of State Debra Bowen issued a statement saying any further changes to the ballot "would seriously jeopardize the integrity of the election."

------ Associated Press Writer Judy Lin in Sacramento contributed to this report.