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Fiscal fight moves toward close, but it’s not there yet

The state’s budget standoff seemed either to be approaching its final chapter, or on the verge of unraveling entirely, depending on your vantage point in the state Capitol Wednesday.

Democratic leaders met with the governor to walk him through their new, $23.3 billion budget plan Wednesday morning. Afterwards, Schwarzenegger walked out of the meeting to face reporters, and discuss all the things in the plan that he didn’t like.

“I cannot sign a budget that has tax increases in it,” Schwarzenegger said. He also criticized Democrats for adopting temporary budget solutions that did not solve the state’s fundamental spending problem, and for failing to cut state worker pay.

After Schwarzenegger’s comments, it sounded as if a budget deal might be unraveling.

But after Assembly Speaker Karen Bass, D-Los Angeles, and Senate leader Darrell Steinberg, D-Sacramento, met with reporters, it seemed again as if the budget dance may be winding to a close. The two Democrats said they will meet with the governor again Thursday, and hope to get a budget to the governor by next week.

“We should be on the floor either Monday or Tuesday,” Bass said. “And when we vote, it’s not going to be a drill. It is the budget, and it is a responsible solution.”

But it is not a solution that the governor, or legislative Republicans, are prepared to accept as is. Even Bass and Steinberg conceded the plan was likely to be revised before coming to the floor next week.

The final sticking points for what may be the end of the budget dance seemed to be laid out by various leaders Wednesday.
Bass and Steinberg would not admit it explicitly, but they realize that their plan for $2 billion in new oil and tobacco taxes is unlikely to get the Republican support they need to pass out of the Legislature.

With taxes off the table, the fight will be over deeper cuts to social welfare and education programs that the Republicans want, or whether to pass a budget with a smaller reserve that the governor and the state’s top fiscal officers say would leave the state racked with a budget deficit next year.

Schwarzenegger reiterated his support for a further reduction in state worker pay. The governor proposed a 5 percent state payroll reduction in his May budget revision. That is on top of the 9.3 percent pay cut state workers are currently taking from two furlough days per month.

Republicans’ initial reaction to the Democratic proposal was knee-jerk opposition to the tax increases. But Republican leaders also indicated the Democratic budget cuts did not go far enough.

Republicans indicated they may push Democrats to make cuts to CalWORKS grants. While Democrats did trim program eligibility, and made cuts in programs for the elderly, blind and disabled, they say the actual size of welfare grants themselves were left untouched.
Republicans also pointed out that the governor made $680 million in education cuts beyond what has been proposed by Democrats. In fact, all of the cuts that were proposed in the Democrats’ plan could be backfilled with federal stimulus dollars, if the state spends all of its education stimulus money in the next budget year.

And now, for the first time, Legislative Republicans are beginning to engage in the budget process. Democrats still need support from at least four Assembly Republicans and two Senate Republicans to maximize the state savings from the proposed cuts. The revenue-increase portions of the budget are expected to be adopted without Republican support.

While Assembly Republican Leader Sam Blakeslee, R-San Luis Obispo, and Senate Republican leader Dennis Hollingsworth, R-Murrieta, both articulated opposition to parts of the Democratic plan, the muted volume of their opposition was among the clues that suggested a deal might be close.

Hollingsworth dismissed the Democrats’ proposal as “gamesmanship,” and suggested Republicans had some different ideas about how to trim the corrections budget that would not result in the early release of some prisoners. But Hollingsworth stopped short of picking apart specific pieces of the Democrats’ proposal.

That could be a good sign for people who want a budget deal. But there is always a danger in assuming a budget deal is imminent.
Deals that have seemed close have unraveled into prolonged budget stalemates in the very recent past.  And there are some warning signs in the current Democratic plan.

“The Democrats are still determined to raise taxes despite clear signals from the public and the markets it’s a ruinous policy,” said Assembly Republican Leader Sam Blakeslee, R-San Luis Obispo.

When asked if Democrats would support a plan that did not address the entire $24 billion budget deficit, he said, “I find that highly unlikely. I think it would be counterproductive to approach this in a piecemeal basis. We need to see the whole solution in a way that produces confidence in the public eyes and the markets eyes.”

The Democrats’ budget contains $2 billion in new taxes on oil production and tobacco that are considered to be non-starters among Republicans. But over the next week or so, we’ll all see whether that $2 billion is enough to derail an entire budget, or just amounts to Democrats’ last feeble protest before further capitulation and deeper cuts.

It may also indicate that local governments’ budgets may again be at risk. The governor had proposed borrowing $2 billion from cities and counties to balance the state’s books – an idea that was rejected by Democrats and Republicans in the Legislature.

But it is more than coincidence that the $2 billion figure is close to the amount in proposed tax increases from Democrats that are expected to be voted down next week. Steinberg even suggested Wednesday that local budgets may again be at risk if Republicans reject the oil and tobacco taxes.

A spokesman for Treasurer Bill Lockyer said the treasurer would withhold comment on any budget proposal until a formal deal was reached between the governor and the Legislature. But Lockyer has expressed concerns about scored state income based on unrealistic assumptions, like the proposed sale of part of the State Compensation Insurance Fund.

Lockyer has also been critical of “one-time fixes,” like the proposal in the Democrats plan to score almost $1 billion in budget savings simply by delaying payment of state workers for one day. Because most state workers get paid monthly, at the end of the month, a one-day delay in payment would push more than 8.3 percent of the state payroll off of the current year’s budget books.

Democrats finished the rough draft of their budget proposal this week, putting forth a proposal that say cuts $11.4 billion in state spending, and offers an additional $9.5 billion in revenue acceleration schemes similar to those outlined by Gov. Arnold Schwarzenegger. But unlike Schwarzenegger, Democrats included $2 billion in new taxes on oil and tobacco – taxes that most people in the Capitol concede are dead on arrival.

Like the governor, the Democrats score $1 billion in Medi-Cal cuts that would require a federal waiver. State Democratice leaders have been on record as opposing that federal waiver.

Schwarzenegger sketched his budget plan in May, with $16 billion in cuts, $2.7 billion in new revenues and fees, and another $5.2 billion in borrowing and other cost-saving measures.

Blakeslee said that was about the mix his caucus is looking for. “I think the framework [of the governor’s plan] is about right. Reasonable people can work t
he details. He’s constructed a very sound framework. Frankly, anything less probably won’t pass the laugh test with markets Scwharzenegger’s budget addresses about $22 billion in savings, and maintains about a $2 billion budget reserve – a reserve that state Treasurer Bill Lockyer, a Democrat, said was fiscally prudent.

Blakeslee said if the Democrats do not address the entire $24 billion budget problem, “People will question whether or not we’re serious about solving the problem.


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