Budget Deal Ends Weeks of Stalemate

SACRAMENTO —  Gov. Arnold Schwarzenegger and legislative leaders ended a nearly monthlong budget impasse late Monday, reaching agreement on a $103-billion spending plan.

“I am a very happy governor because we have just agreed to a budget,” Schwarzenegger said at a hastily arranged late-night news conference in his office suite in the Capitol. “We negotiated very hard. We again proved that working together, Democrats and Republicans working together, we can do the impossible.”

The agreement came after weeks of partisan feuding, during which the governor referred to Democratic legislators as “girlie men” and “children.”

Senate President Pro Tem John Burton (D-San Francisco) said he was pleased with the final compromise.

“In the budget there are more things that we may not like than we like, but on the whole we think it’s a very fair budget for the people of California,” he said.

“How did it happen? I think speaking for myself and my Senate colleagues,” Burton quipped, “when we accepted the fact that we were really ‘girlie men,’ we were just able to get over that.”

The proposed budget -- which still must be approved by both houses of the Legislature -- calls for no new taxes and uses billions of dollars in borrowing to avoid deep cuts in government services. The biggest spending reductions would be made in funding for cities, counties and local schools -- all of which would be temporary.

The end result would be a budget that largely avoids Draconian cuts in spending in the short term, but leaves the state to reckon with projected deficits of up to $10 billion for each of the next two years.

Legislative leaders and the governor still have to convince other lawmakers before they vote on it later this week. The few Democrats who went to their party’s national convention in Boston have been ordered to return immediately to join their colleagues for a long caucus to go over all the details.

The tough sell for the governor, however, will be in his own party. Many in the GOP have expressed doubts about the amount of borrowing in the plan.

The deal was reached as the human cost of the political dispute was starting to take shape. State Controller Steve Westly announced Monday that he would not be able to make hundreds of millions of dollars in monthly payments scheduled for Wednesday to schools, community colleges and transportation agencies. He warned that payments to hospitals could stop in a few weeks.

“It really goes from being an academic exercise to something that becomes very real over the next one to two weeks,” Westly said.

Soon after Westly’s announcement, word spread in the Capitol that a handful of bitter disputes that have held up passage of the budget since the July 1 start of the fiscal year had been resolved.

“People just wanted to get it done,” said Senate President Pro Tem John Burton (D-San Francisco).

Monday’s deal begins to close what has been the most difficult chapter yet for the Schwarzenegger administration.

The governor had repeatedly promised voters that he would sign a budget before the fiscal year began. And he appeared to be on his way to doing that in March, when voters approved $15 billion in borrowing. The bonds allowed the governor to offer a spending plan that doesn’t raise taxes without cutting too deeply into the programs that are important to Democrats, who command the majority in both houses of the Legislature.

The governor also seemed to neutralize potential legislative opposition by forging agreements with teachers unions, higher education officials and local government leaders -- groups the Democrats hoped to stand with in battle.

But in the end, it took the governor longer to reach an agreement on the budget than it did for his predecessor, former Gov. Gray Davis, last year -- when voters cited their frustration with late budgets as a reason for recalling Davis.

It was issues on the margins of the budget with symbolic value to Democrats and Republicans that caused Schwarzenegger to lose control of the process.

The deal didn’t near a close until legislative leaders could agree on one of the smallest line items in the budget: a loophole that allows owners of luxury yachts to avoid paying the sales tax on them by keeping the yachts in Mexico for three months.

Democrats said the loophole sends the message that rich people needn’t pay their fair share, as Republicans warned that closing it would wreck the state’s yacht industry.

In the end, they agreed to close the loophole for two years and study its impact on the industry.

The governor ultimately joined Democrats to push for the change. “Arnold, God love him, he went to bat on it,” Burton said.

But in other places where it came down to ideology, the Democrats dug in their heels against the governor.

They refused to go along with a plan Schwarzenegger worked out with city and county leaders to protect their funding. Under that agreement, the cities and counties would accept $2.6 billion in cuts over the next two years in exchange for a constitutional amendment prohibiting the state from ever cutting them again.

Democrats said that would give local governments unprecedented protection in the budget -- leaving schools, state universities and other programs vulnerable during a fiscal emergency.

The proposal worked out Monday would allow the state to borrow from cities and counties with a two-thirds vote of the Legislature. But it would limit such borrowing to twice every 10 years.

The other sticking points to getting a deal had even less significance to the budget. They involved labor laws approved under the Davis administration that GOP legislators charged were a giveaway to unions.

Republicans said those laws would have to go before they supported any budget.

After weeks of resistance, Democrats finally agreed to weaken what the GOP has dubbed the “sue your boss law.” That law allows workers to file multimillion-dollar lawsuits against their employers for a variety of offensives -- some of them as small as using the wrong size type on posters that inform employees of their rights.

The compromise would allow employees to sue for major violations, but only if the Labor and Workforce Development Agency refuses to act. And Democrats agreed to prohibit any suits for such minor violations as failure to post labor rules.

California Chamber of Commerce President Allan Zaremberg said the agreement “stops unscrupulous attorneys from exploiting the ability to extract outrageous fines for small infractions.”

But another defeat Republicans were determined to hand to labor failed to materialize. The GOP wanted to repeal a law that restricts schools from contracting out for transportation, janitorial and other noninstructional services to companies that pay below union wage.

The Democrats agreed to some concessions, but Republicans said they weren’t enough.

Now the Republicans are going to try to bring that issue to voters through an initiative.

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Community college payments are at risk

If a budget deal isn’t reached by Wednesday, the state must suspend $213 million in payments owed to community college districts in July. The money would be paid once a spending plan is in place. Totals by county:

Los Angeles -- $62,561,425

Orange -- $16,345,152

Riverside -- $7,711,919

San Bernardino -- $8,789,428

San Diego -- $16,288,222

Ventura -- $5,022,728

Source: California controller

Times staff writers Jordan Rau and Robert Salladay contributed to this report.