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From Susan Ferriss and Torey Van Oot

For state lawmakers, ringing in the New Year also means getting ready for what's shaping up to be another painful budget season.

They'll return to the Capitol Jan. 4 to tackle a deficit that is expected to swell to $6.3 billion by the end of the fiscal year.

Filling that hole -- and the $21 billion deficit projected for the next 18 months --tops Senate President Pro Tem Darrell Steinberg's list of priorities for the new year.

Steinberg said in an interview with The Bee that while further cuts and new revenues will be needed to close that gap, the first place to look for cost savings is in the prisons.

He called the prisons package passed by the Legislature this year a "major accomplishment," but said the courts still provided "another venue" for following through on some of the cost-saving proposals that could not garner enough support to win approval in the Assembly.

"I would prefer that the Legislature be the first path and the first course of action, but we saw what happened last year when the Senate and the Assembly made some changes, but not enough," he said.

Steinberg said Gov. Arnold Schwarzenegger's administration and judges are continuing to negotiate - and making headway - on how to solve prison overcrowding lawsuits.

He said it makes sense to him to continue to try to overhaul the corrections system to reserve prisons for those serving time for violent and more serious crimes while those with less serious convictions could do their time in other jail systems. Making cuts to rehabilitation programs "should be the last thing we should do," he said.

Speaking more broadly about his strategy for dealing with the deficit, Steinberg said he hopes to keep cuts "minimal" and cautioned against another year of sweeping cuts to schools and social programs.

"We'll take one bite at a time and look at the current fiscal year," he said, adding that "Even deeper cuts become counter to restoring the health of the economy."

Steinberg said the Legislature needs to look at eliminating ineffectual tax credits and closing tax loopholes. Steinberg also said he would like to revive some revenue proposals that fell flat last year.

One of those ideas, he said, is requiring 3 percent withholding on payments to independent contractors, a proposal blocked by the governor and GOP lawmakers. Steinberg said that plan could raise $1.9 billion in revenues.

"We can't avoid that option next year," he said.

Steinberg also said that he thinks the state must start to chip away at its bond debt, possibly by linking new revenue proposals to paying off the state's bond obligations.

"I am talking to you about an entirely different approach," for addressing debts, he said.

While he acknowledged that passing revenue increases is a difficult task, he said the pain average Californians have felt because of last year's cuts might make such proposals more palatable.

"Everything has to be compared to that," he said, asking whether an independent contractors' tax idea is so bad "compared to what we see on college campuses?"

Steinberg also voiced support for changing the way the Legislature conducts its business, including transitioning to a two-year budget and shifting the focus of legislative committees to review the impact of existing laws, as opposed to producing new bills.

"We need to do a better job of shining a light... on what works well and doesn't," he said.

Steinberg pointed to several other items on the Senate's agenda for the first weeks of the new year, including coming to a consensus on rival plans for ensuring California can compete for Race to the Top federal education dollars and considering the confirmation of Schwarzenegger's lieutenant governor nominee, Republican Sen. Abel Maldonado.

On Race to the Top, Steinberg said the Assembly and the Senate - and the governor - are moving closer to agreement on a bill they can all support. Some of the outstanding issues, he said, include agreeing to a cap on how many charter schools can be formed and how to deal with parents taking kids out of failing schools.

The Maldonado confirmation process presents a bit more of a pickle. Legislators in both houses have until late February -- 90 days after the nomination was announced -- to confirm or reject the governor's choice. If they do not act within that window, Maldonado automatically assumes the post.

Steinberg plans to schedule a confirmation hearing for Maldonado but said he's in no rush to take up the nomination. He said his first concern is rounding up the votes for budget solutions early in the year -- Maldonado in the past has broken ranks from the GOP on budget issues.

"I know we need Senator Maldonado on the Senate floor in late January and early February," he said.

With many factors influencing whether the votes are there to confirm Maldonado - several senators are already vying for the "guv lite" post in 2010 - but Democrats are hungry for a shot at picking up Maldonado's Senate seat in a special election -- Steinberg called the decision a "seven-dimensional game of chess."

But he said his mind -- and the minds of his colleagues -- were open to giving the nomination a fair and full consideration.

"I pride myself on giving a lot of thought to these decisions," he said.

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