State budget deal is reached

Legislative leaders announced Sunday that they had reached a deal on a no-new-taxes state spending plan, bringing the longest budget impasse in modern California history nearly to an end.

Their proposal would increase spending for education and healthcare, though not enough to avoid cutbacks in services. It would borrow against the state lottery. And it relies heavily on maneuvers that would push the state’s financial problems into the future at a time when economists have little hope that revenue is on the rebound.

That plan would require hundreds of thousands of businesses and individuals to hand over more of their taxes sooner, so the state could use the cash infusion to pay its bills. The payments made now would not be available for next year’s budget.

Votes on the plan are scheduled for today in the Assembly and Senate.

Gov. Arnold Schwarzenegger, who appears to have been left out of the final deal-making, is not yet on board, and administration officials suggested he could demand changes. Nevertheless, legislative leaders said they expected the governor to approve the package.

“We will very quickly send the budget down to the governor, and we will expect his signature,” said Assembly Speaker Karen Bass (D-Los Angeles) at a Sunday news conference with Senate President Pro Tem Don Perata (D-Oakland) and Republican leaders.

Once the governor signs a budget, the state can resume paying its bills.

The deal came days after Democrats in the Senate abandoned their months-long crusade to close the $15.2-billion budget gap with the help of increased taxes. They argued that balancing the budget any other way would be fiscally irresponsible and bleed state services.

Schwarzenegger supported that argument, but his fellow Republicans in the Legislature would not go along with a tax hike. The budget needs a two-thirds vote to pass, requiring at least eight Republicans.

“This won’t make my highlights reel,” Perata said Sunday, after he and other leaders put the finishing touches on the deal behind closed doors. But on the 76th day of the fiscal year, he said, “it was time to end this.”

Schwarzenegger spokesman Aaron McLear said the lawmakers’ agreement, which includes a provision to boost the state’s rainy-day fund, may not meet the governor’s demand for restraints on spending when state coffers are flush.

“We are analyzing their proposal but have concerns that budget reform may not be strong enough,” he said.

If the governor were to veto the budget, lawmakers could override him with the same two-thirds vote required to pass it.

Meanwhile, legislators said the proposed cuts to schools, healthcare programs and social services were no deeper than those Democrats had already agreed on. And they said their plan would not borrow from local governments or transportation accounts.

The tax-related measures, which Perata called revenue “accelerations,” would affect businesses and individuals in several ways, beginning in coming months.

Withholding of state taxes at the workplace would increase by 10% for families with two wage-earners and for all taxpayers with income from investments. The state could use the extra $1.5 billion generated by the scheme to reduce the budget gap; it would send those taxpayers extra refunds later.

Taxpayers who file quarterly would have to pay more of their taxes earlier in the year. And those who earn more than $1 million and experience a big jump in income would no longer have extra time to pay taxes on the increase. These measures, according to legislative staff, would generate $3.8 billion in the current fiscal year.

Limited liability companies would have to prepay fees that normally would not be due until the next fiscal year. The state would give tax cheats amnesty to encourage them to pay what they owe. And tax write-offs for business losses would be suspended temporarily. These measures would generate $2.7 billion this year.

Advocates of a tax hike criticized the budget deal for pushing this year’s problems into the future.

“The proposed budget not only fails to fix the ongoing budget crisis but places health and other vital services at even more risk in future years,” said Anthony Wright, executive director of the nonprofit Health Access California, which advocates for the poor.

Republican legislative leaders said they were pleased the state would not be raising taxes, though they expressed little enthusiasm for the final agreement.

“It doesn’t solve the structural deficit problems we have in our budget,” said Senate Republican Leader Dave Cogdill of Modesto.

Voters would ultimately have to approve, perhaps next spring, some elements of the budget deal. The proposal to bolster the state’s rainy-day fund would require changes to the state Constitution, as would plans to modernize the California lottery and borrow against future earnings. If voters said yes, the lottery proceeds would not be available to the state until the 2009-10 fiscal year.

The absence of a state budget has wreaked havoc on providers of government services and those who rely on them. Billions of dollars in scheduled payments to healthcare clinics, day-care centers, group homes for the disabled and others have been withheld since July.

Some small providers were forced to shut their doors. Others have borrowed from friends and relatives to fund their payrolls or asked employees to work without pay until a budget is passed.

The passage of a budget would ease the anxiety of most state employees, whose pay the governor has been trying to cut to the federal minimum wage of $6.55 per hour until a budget is passed. The governor, however, has been unsuccessful so far in getting the courts to force State Controller John Chiang, who runs the state payroll, to carry out his pay-cut order.

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evan.halper@latimes.com