California budget plan relies on accounting maneuvers

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The California state capitol building in Sacramento.

California lawmakers got their first look Wednesday at a proposal that attempts to end the state's record-long budget impasse and close a $19 billion deficit, primarily through targeted spending cuts and a large dose of creative accounting.

The deal, reached late last week between Gov. Arnold Schwarzenegger and the four Republican and Democratic leaders of the Assembly and Senate, does not contain new taxes or fees. Instead, it relies on a series of assumptions and accounting maneuvers that in all likelihood will punt many of this year's budget problems to the next governor.

It also includes a plan to create a stronger rainy day fund and some pension reforms, both demanded by Schwarzenegger as a condition for his signing any budget bill.

The agreement targets new state employees by rolling back lucrative pension benefits granted 11 years ago and would end a practice in which government workers could boost their pensions by getting raises during their final year of service. The pension rollback would not apply to current employees.

"We always said that there were no good (budget) solutions left, which is why the governor was so adamant about getting the reforms necessary to fix our system," said Schwarzenegger spokesman Aaron McLear. He said the cuts and reforms "will absolutely help future leaders of this state govern more efficiently."

Late Wednesday, the largest union in state government tentatively agreed to a pension reform plan, officials said.

Department of Personnel Administration spokeswoman Lynelle Jolley said the plan must still be approved by Legislature and the 95,000 members of the Service Employees International Union Local 1000.

Jolley said the plan would roll back pension formulas for new employees to pre-1999 levels, and increase current employees' contributions toward pension benefits by 3 percent. It would also include one day of unpaid leave per month for each employee, which reduces pay by roughly 5 percent.

A joint Senate and Assembly budget committee heard testimony from the state's tax collectors and Department of Finance during a brief hearing Wednesday. The committee's chairwoman, Sen. Denise Ducheny, D-San Diego, said much of the budget's technical language was still being written before budget votes scheduled for Thursday in the full Senate and Assembly.

Wednesday's meeting gave the first public airing - however brief - of the agreement reached between the Republican governor and top lawmakers. It is filled with assumptions that may underestimate actual income.

For example, it counts on the state receiving $5.3 billion from the federal government, nearly $2 billion more than Schwarzenegger projected in May. Schwarzenegger and the legislative leaders also assume an economic recovery in California that would be robust enough to send $1.4 billion in additional tax revenue to state coffers.

The deal also would delay nearly $2 billion in payments to K-12 schools and community colleges until the next fiscal year.

Senate President Pro Tem Darrell Steinberg, D-Sacramento, acknowledged last week that the budget negotiators had little choice but to engage in what he called "creative" accounting to reach a deal. That's because Republicans refused anything that could be interpreted as a tax or fee increase, while Democrats were unwilling to cut more than $7.5 billion in spending.

To patch last year's budget gap, the Legislature and Schwarzenegger agreed to temporary increases in the vehicle license fee and sales and income taxes. Voters rejected a proposal to extend those taxes during a May 2009 special election, leading Schwarzenegger to say he would not agree to higher taxes this year.

The assumptions used to reduce the $19 billion deficit in the current plan mean Schwarzenegger is leaving the budget mess to his successor, either Democrat Jerry Brown or Republican Meg Whitman, said Fred Silva, who spent 20 years working on budget issues in the state Senate.

He said the next governor likely will have to redo this year's budget even as he or she proposes a spending plan for the next fiscal year. The amount set aside for reserves, typically used for emergencies, is just $323 million.

"The question, with only a $300 million reserve, is if this holds. With this economy, it's anybody's guess," said Silva, now a senior fiscal adviser at California Forward, a bipartisan group seeking a solution to the state's structural problems.

Similar budgets, based on shaky assumptions and accounting tricks, have imploded within months in recent years, forcing lawmakers to consider midyear spending cuts or revenue increases. The rainy day fund would have to be approved by voters in 2012.

This year's budget impasse represents the longest California has ever gone without an approved spending plan since the July 1 start of its fiscal year.

State tax revenue has been hammered as the national recession has taken a deep toll on California's economy, forcing lawmakers to make deep spending cuts. The deficit represents more than 20 percent of the state's $87.5 billion general fund, which was as high as $103 billion as recently as the 2007-08 fiscal year.

If lawmakers don't pass a budget this week, more than three months into the new fiscal year, the state controller's office says it might have to start issuing IOUs. The treasurer's office says an estimated $7 billion in planned public works projects also could be jeopardized.

The state has been unable to pay thousands of contractors nearly $3 billion without a budget in place.

Some Republican votes are needed in each house to reach the two-thirds legislative vote needed to pass a budget bill.

© 2010 The Associated Press.

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