Legislative leaders reached a tentative deal Thursday with Gov. Arnold Schwarzenegger on a $104.3 billion general fund budget after they agreed to satisfy his demands to strengthen a rainy-day fund and eliminate a maneuver to accelerate collection of income tax from residents.
The Assembly and Senate are scheduled to vote on the final changes today, 81 days into the fiscal year, capping the longest budget delay in California history.
Schwarzenegger's budget signature would end a nearly three-month saga in which California stopped billions in payments to health care providers, community colleges, schools and vendors who do business with the state.
It also would render moot the governor's attempt to slash state worker salaries to the federal minimum wage and increases the chances that Schwarzenegger will seriously consider more than 800 bills being sent to his desk.
"It appears that we have an agreement," said Schwarzenegger press secretary Aaron McLear. "We will be able to confirm that once the governor meets with the legislative leaders tomorrow.
"I'm not in a position to discuss the details of the agreement other than it has met the governor's demands to provide real budget reform and not take money from people's paychecks."
Legislative leaders from both parties said Thursday that they'd reached a tentative deal after two meetings with Schwarzenegger that lasted about half an hour each.
Lawmakers thought they had resolved the budget when they voted on a plan early Tuesday that eliminated a $15.2 billion shortfall through a mix of borrowing, accounting shifts and suspending cost-of-living adjustments for low-income residents.
But Schwarzenegger vowed to veto that spending plan because he said its rainy-day fund to help the state through bad economic times was too weak.
He also demanded Thursday that lawmakers remove a $1.5 billion proposal to withhold extra income taxes from residents that the state would not pay back until 2010, though legislative leaders insisted that the idea had originated in the governor's own Department of Finance. Schwarzenegger never publicly made such a proposal.
That particular idea drew scorn as critics accused lawmakers of trying to balance the budget with a no-interest loan from taxpayers.
Legislators ultimately agreed Thursday to tighten the rainy-day fund so that it can be tapped only during bad economic times, a concession from Democrats who wanted greater ability to access the money.
Lawmakers also proposed making up the lost $1.5 billion revenue by increasing penalties on corporations that underpay taxes. Leaders agreed to lower the amount of the state's reserve fund from $1.2 billion to $800 million.
Under the latest budget plan, corporations that underpay their taxes by $1 million or more would see penalties rise from 10 percent to 20 percent. The deal also assumes a cancellation of a proposed tax amnesty program.
"I think that the change is that it shifts it away from individuals to companies, and it also does not affect small businesses," said Assembly Speaker Karen Bass, D-Los Angeles.
The budget plan still includes a $2.3 billion maneuver that demands "accelerated" tax payments from corporations and wealthy earners.
"I feel like we've gotten to where we need to be," said Assembly Republican Leader Mike Villines of Clovis. "I feel like we should be able to put this thing to bed."
Jean Ross of the California Budget Project, an advocacy group for the working poor, said the corporate fee increase is "potentially even more gimmicky" because that revenue is less secure. She said the budget as a whole will put the state back into another budget problem next year.
"The reality is, it does nothing for next year except it fails to bring in the real revenue we need to make progress," Ross said.
Lawmakers this week openly discussed trying to override a Schwarzenegger veto to enact their Tuesday budget, but they were unsure whether they could get enough GOP support. They opted to negotiate with him instead.
"Real people are getting hurt," said Senate President Pro Tem Don Perata, D-Oakland. "The governor was convinced that the best thing to do was veto it, and that would have set us back, Lord knows how long."
Bass put the Capitol in a brief holding pattern Thursday when she avoided comment so she could talk to her caucus.
But she said an hour later that she was confident that both houses will approve the deal today and that Schwarzenegger would sign it.
"I don't think anybody is celebrating," Bass said, "but everybody recognizes that we need to end 80-plus days of pain in the state of California."
Democrats wanted to increase taxes on high-income earners, while Schwarzenegger proposed in August a temporary 1-cent sales tax to balance the budget.
But Republicans pledged to oppose any new tax increases and said spending cuts were necessary.
Bass said she had no reason to believe that Republicans would have agreed to tax increases had Democrats held out on the budget any longer.
Lawmakers anticipate placing the budget rainy-day proposal and a California Lottery expansion on a special election ballot that could take place as early as March, when Los Angeles will hold a mayoral election.
Bass said a water bond is possible for the same ballot.
Call Kevin Yamamura, Bee Capitol Bureau, (916) 326-5548.
