Lawmakers cede to Schwarzenegger's budget demands

California lawmakers are scheduled to vote Friday on a compromise budget deal that averted a historic veto by including Gov. Arnold Schwarzenegger's demands for budget reform.

The spending plan also scraps some of the borrowing gimmicks opposed by Schwarzenegger, who threatened to reject an agreement legislators approved just days earlier.

The state's four legislative leaders met with the governor again Thursday and agreed to many of his demands after conceding they were uncertain whether they could muster the two-thirds vote of the state Legislature required to override his veto,

They emerged from a mid-afternoon meeting saying they would change the $143 billion spending plan the Legislature approved two days earlier.

The deal came 80 days into California's fiscal year, making it the longest budget stalemate in California history. Without a spending plan, the state has been forced to suspend billions of dollars in payments to schools, medical clinics, daycare centers and state vendors since July 1.

Schwarzenegger had criticized the earlier plan for failing to meet his demands for a more robust rainy day fund. He said the budget relied on accounting gimmicks to close a $15.2 billion deficit — such as collecting an extra 10 percent of workers' income tax in advance and repaying it later — that could lead to an even larger deficit next year.

The four legislative leaders said they had agreed to remove that provision in their latest deal.

They planned to take up two bills. One would levy larger fines against businesses that underreport their tax liabilities, and another would ensure the state's rainy day fund could only be tapped when revenues fall below projected spending — the last remaining piece of the budget reforms Schwarzenegger sought.

The remainder of the budget approved Tuesday will stand, including $7.1 billion in spending cuts that advocates say will trigger deep cuts to health care in the future.

It was unclear how soon Schwarzenegger could sign the new spending plan if lawmakers in both houses approve it Friday. However, the rainy day fund and a proposal to borrow $10 billion against anticipated lottery revenues to help stabilize future budgets would require voter approval, likely in a special election early next year.

While the deal struck Thursday removes some accounting gimmicks, it leaves others intact.

It would require those who pay estimated taxes, including corporations and wealthier Californians, to pay a greater percentage of their annual taxes in the first two quarters of the year, a move that would generate $2.3 billion for this fiscal year. But the state would lower their tax payments in the last two quarters, artificially inflating state revenues.

New millionaires would have to pony up their taxes earlier and the state would borrow nearly $1 billion from special funds intended for other uses, such as transportation projects and reducing smog.

Lawmakers agreed to undo a proposal, passed on a majority vote without Republican support, that would have raised income tax payments for working Californians by 10 percent beginning Jan. 1. Under that plan, taxes would be collected earlier, but the total tax paid would not change.

Also removed was a tax amnesty program that would have allowed businesses and people who owe the state money to pay overdue taxes without penalty. Analysts worried the program, which also was implemented a few years ago, would not have generated the amount the state projected.

Instead, the lawmakers are seeking to raise the fines on corporations that underreport the taxes they owe, to 20 percent from the current 10 percent. They said that would generate an estimated $1.5 billion in the next fiscal year.

Schwarzenegger's anticipated Friday veto would have marked the first time in modern history that a California governor vetoed an entire budget package.

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