California lawmakers early Tuesday ended the longest budget impasse in state history, approving a roughly $145 billion spending plan that relies on accelerated income tax payments rather than borrowing or new taxes.
Lawmakers acknowledged the proposal would get the state through its current fiscal year by closing a $15.2 billion deficit but would not solve California's persistent fiscal problems.
“Let's be clear: All we've done is roll the problem over to the next Legislature,” said Senate President Pro Tem Don Perata, D-Oakland, who is termed out of office this year.
The final action in the Assembly, on a 61-1 vote, came shortly after 2 a.m. on the 78th day of the fiscal year, the latest date the Legislature had ever passed a spending plan. The Senate approved the package of budget bills 28-12 earlier in the morning.
Lawmakers said they were ready to end a deadlock that had paralyzed the Capitol for months, even if the final deal satisfied almost no one. The budget deadlock had delayed billions of dollars in payments to certain school programs, medical clinics and vendors, while stalling negotiations over broader policy issues such as revamping the state's water system.
“It has been a very difficult process,” said Assemblyman Roger Niello, R-Fair Oaks. “We have to come to closure.”
Despite the apparent end to this summer's grueling budget battle, it was not immediately clear whether Gov. Arnold Schwarzenegger would sign the bill sent to his desk.
He told lawmakers he would not support the compromise proposal unless it contained a more robust rainy day fund. In a letter to the four legislative leaders, Schwarzenegger also demanded language ensuring that the fund could be tapped only in years when revenue falls below projected spending.
Lawmakers negotiated changes to meet at least some of the governor's demands. Schwarzenegger has insisted that this year's budget include some reform measures to help smooth the recurring imbalance between revenue and spending.
The budget proposal includes $7.1 billion in spending cuts and fills the remaining gap by moving up tax collection deadlines and closing some tax loopholes. Those maneuvers will generate $9.3 billion, leaving a small reserve for unanticipated expenses.
A portion of the revenue depends on increasing state income tax withholdings by 10 percent for working Californians, a move that would raise $1.6 billion. It also would require those who pay estimated taxes — including corporations and wealthier Californians — to pay 30 percent of their taxes in each of the first two quarters of the fiscal year instead of 25 percent. That move would generate $2.3 billion.
Another $1.9 billion would be added through a two-year suspension of tax deductions that businesses can take for losses, known as net operating losses, and limiting other tax credits.
Tax experts said the result of higher withholdings will mean less take-home pay for many workers. Taxpayers can adapt by adjusting withholdings once the change takes effect, said Lenny Goldberg of the California Tax Reform Association.
“It's really about timing,” he said. “It will come out of people's take-home pay, and they will end up getting a bigger refund in April … We don't know if people will increase their dependents to avoid it.”
At some point, the accelerated income tax and quarterly payments would have to be repaid to taxpayers, potentially through refunds.
Some provisions of the plan will require voter approval, likely through a special election. Those include the changes to the state's rainy day formula and a $10 billion plan to borrow against future lottery revenue.
Should voters reject the lottery proposal, it would leave a $5 billion hole in each of the next two fiscal years.
Assemblyman Fabian Nunez, the former speaker, said no one was satisfied with the final budget proposal. He said lawmakers' options were limited, in part by the souring economy and the two-thirds majority vote needed to pass a budget.
“At this point, I think they did the best they could,” said Nunez, D-Los Angeles. “The only complaint I had is I wish we would have done this the first week of July.”
Assembly Speaker Karen Bass said the $104.3 billion general fund spending plan does not address California's long-term difficulty in balancing spending with revenue. But the Los Angeles Democrat said it was important for lawmakers to finish work on the budget for the current fiscal year, which began July 1.
During the impasse, Republicans have refused to raise taxes on corporations and the wealthy, as Democrats had proposed. The impasse continued despite Schwarzenegger's offer to increase the state sales tax 1 cent for three years.
“At the end of the day, we weren't able to raise the revenues we wanted,” Bass told reporters Monday. “But we were able to close significant budget loopholes that is giving us revenue in this budget year that prevent us from having to make the draconian cuts.”
The cuts include many of those the governor proposed in his May budget revision, although Democrats rejected what they considered the worst of those reductions. They did not want to reduce foster care funding or kick children off welfare if their parents don't find work within five years.
Under the latest plan, the state would restore nearly all the 10 percent cuts to doctors, dentists and nurses providing care under Medi-Cal, the state's health insurance program for the poor. Those rate cuts, which had been adopted in February, will be restored starting in March 2009.
Without new taxes, legislative leaders agreed to generate one-time cash by moving up the tax collection deadlines and closing some tax loopholes.
The compromise includes temporarily suspending tax deductions for business losses, borrowing from special funds, granting a tax amnesty and closing the infamous “yacht tax” loophole. That allowed people to avoid paying state sales tax on boats, RVs, airplanes and other large luxury items if they took possession of them out of state and kept them there for more than 90 days.
It also would increase the state's rainy day fund from its current level, which is 5 percent of the general fund budget.
Schwarzenegger wanted 3 percent of general fund revenue to be automatically deposited into the rainy day account each year, stopping only when the account reaches 12.5 percent of the general fund. The Legislature agreed to that demand.
He also wanted assurances that the fund could be tapped only when revenue falls below projected spending, but the Democratic majority rejected it. Perata said lawmakers wanted more flexibility to draw from the fund.
He and his Republican counterpart, Senate Minority Leader Dave Cogdill, said they were prepared to override a gubernatorial veto, if needed.
“Hopefully, he's in a flip-flopping mood and he'll sign this thing and we can move on,” said Cogdill, R-Modesto.
Under the budget, the governor would have authority to cut up to 7 percent from state operations when revenue comes in lower than expected. But cuts to education and health and human services, two of the state's biggest areas of spending, would be excluded.
The governor also would have the ability to impose a four-month freeze on cost-of-living increases for benefits.
Schwarzenegger had sought unilateral authority to make midyear cuts.