Don't get too comfortable, California.

Sure, Gov. Arnold Schwarzenegger signed a budget revision Tuesday intended to resolve the state's $24 billion deficit and get the state past June 2010.

But the plan has plenty of land mines that could rupture the budget balance and force lawmakers to return to the negotiating table in a matter of months.

The biggest is the state's economy.

While the budget accounts for lower revenues as the state works through an economic recession, if California's 11.6 percent unemployment rate worsens or the stock market slumps, the state could miss projections and face another shortfall. State revenues in June, for instance, were $536 million lower than the governor had anticipated just weeks before in his revised May budget.

"California has one of the higher rates of unemployment, we were the state that was the center of the housing boom-bust," said Daniel Mitchell, professor emeritus at UCLA's Anderson Graduate School of Management. "We have a lot to do to work our way out of the problem that was created. So there is a broad element of risk."

Other problems exist.

The state is counting on a $1.7 billion payment from redevelopment agencies that faces a tough legal fight. The California Redevelopment Association is preparing to file suit against the fund shift within the next 60 days, said its executive director, John Shirey.

Part of that shift – $350 million – is money the state wanted to take last year. But a Sacramento Superior Court judge blocked that payment in April on grounds that the state planned to take money from redevelopment districts and give it to schools outside those areas.

Lawmakers believe the new $1.7 billion shift is constitutional because they wrote language addressing that flaw. But Shirey said there are multiple grounds for filing suit against the state.

"The people who told them this version is legal are the same ones that told them it was legal last year," Shirey said. "It ignores the content of the constitution, which says redevelopment tax funds must go to agencies for the purposes of paying debt and redevelopment expenses."

Under the latest budget agreement, redevelopment agencies would pay that money next May. If a court rules against the transfer, the state would have to find another $1.7 billion.

The budget also assumes California will receive $1 billion by selling a portion of its workers' compensation provider, known as the State Compensation Insurance Fund, or SCIF. The state hopes to sell part of its client lists to private insurers.

Department of Finance spokesman H.D. Palmer called $1 billion a "conservative estimate."

But Mitchell warned that asset sales in this climate will be depressed, and it may be difficult to find enough buyers at the price the state expects. The nonpartisan Legislative Analyst's Office said in May that it doubted whether an SCIF sale could help the budget in 2009-10, and classified the plan as a significant risk.

The state is counting on $1 billion in federal waivers and payments to save money in its Medi-Cal program for low-income residents. The state anticipates significant savings by shifting costs the federal government would pay through Medicare, as well as obtaining waivers that would enable Medi-Cal to reduce coverage.

The federal government has resisted previous state attempts to shift costs, said Andrew LaMar, spokesman for the California Medical Association, which represents 35,000 physicians.

"Our concern is, if you score savings in Medi-Cal that most people would say is funny money, the danger is three to six months down the road we're looking at more cuts to Medi-Cal services or other aspects," LaMar said.

But Palmer said Schwarzenegger officials have had "productive conversations" with U.S. Health and Human Services Secretary Kathleen Sebelius. Anthony Wright, executive director of Health Access California, also expressed confidence the state will receive federal help, suggesting that President Barack Obama may be more willing to help California, a Democratic state, than was President George W. Bush.

Lawmakers left unanswered roughly $600 million in specific cuts to prisons that may invite controversy when the Legislature reconvenes next month. Schwarzenegger's proposal to achieve those savings relies in part on reducing the state's inmate population, a plan that some Republicans and victims' rights groups have criticized as "early release" of prisoners.

His corrections director, Matthew Cate, disputed that characterization last month, and Democrats are likely to approve such changes on a majority-vote basis.

But Democratic leaders suggested Tuesday that there could be legal action against some of the governor's $489 million in line-item vetoes, particularly cuts in health and welfare services. If legal avenues are not pursued, leaders may reopen part of the budget to replace those cuts.

State leaders are among the first to acknowledge that the budget has its flaws and further remedies may be required.

"We are still in troubled waters; there are still uncertainties," Schwarzenegger said Friday after lawmakers sent him the budget package. "We don't know how much longer our revenues will drop. We don't also know if we may not be back in the next six months to make further cuts."

Experts agree that California faces significant deficit problems for years to come, even if the state survives through this year. Department of Finance Director Mike Genest said the state faces a $7 billion to $8 billion structural deficit in the next fiscal year, with even worse shortfalls after that because temporary sales, vehicle taxes and income taxes end starting in 2011.

The state exhausted three new accounting tricks in this budget agreement that won't be options the next time around. It will delay state worker June paychecks by one day, pushing the payments into the 2010-11 fiscal year. It will ask employers to increase tax withholding by 10 percent starting in November. And it will ask quarterly tax filers to front-load 70 percent of their 2010 tax payments in the first half of the year.

While those maneuvers don't run the same revenue risk as the State Compensation Insurance Fund sale, they are one-time solutions that the state is unlikely to reverse for years to come – and a sign of how desperate leaders were.

"These sort of things only work once," said Robert Yetman, a tax professor at the UC Davis Graduate School of Management. "There's no viable alternative but to continue them in perpetuity. To discontinue them would require the state to make additional payments next year."

Genest acknowledged as much Tuesday. "Once you do it," he said, "it's hard to step back."

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Call Kevin Yamamura, Bee Capitol Bureau, (916) 326-5548.

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