California Gov. Arnold Schwarzenegger, center, speaks about delays in funding for infrastructure projects due to the state budget crisis during a news conference at a park in Sacramento, Calif., on Dec. 23. At the left is Lester A. Snow, director of the state Department of Water Resources, and at the right is Sacramento City Councilman Ray Tretheway. (AP Photo/Steve Yeater)
Calling California's declining fiscal health "a major crisis," Gov. Arnold Schwarzenegger's finance director on Wednesday released the administration's latest plan to close a $41.6 billion budget deficit.
Much of the proposal looks like one Schwarzenegger released earlier this year, including a temporary sales tax increase and expansion of the state sales tax to some services.
The budget plan is unusual for two reasons: It covers the rest of the current fiscal year and the next one starting July 1, rather than just a single year, and it comes early.
California governors typically release their budget proposals for the coming fiscal year in early January, adhering to a constitutional deadline.
Administration officials said the state's unprecedented cash crisis and the inability of the Legislature to close the growing deficit forced Schwarzenegger to act early.
The administration's proposal calls for $14.3 billion in tax increases and other new revenue, and $17.4 billion in spending cuts over the next 18 months. It also relies on borrowing and a plan the Legislature approved earlier this year to sell bonds to Wall Street investment firms based on the future value of the state lottery.
Lawmakers are facing an urgent deadline to strike a budget deal. State finance officials say California will run out of money sometime in February, when it will have to start issuing IOUs to employees and contractors.
Taxpayers in line for refunds this year also would get IOUs in place of checks.
"We are facing a major crisis, probably the most challenging budget situation the state has ever faced," state Finance Director Mike Genest said in releasing the plan to reporters.
The nation's shaky credit market also has made it difficult - if not impossible - for the state to borrow money to pay for its daily operations.
Yet the proposal released Wednesday relies on a risky plan for California to borrow about $5 billion, money to be repaid at a later date. Genest said he wasn't sure when or how California would repay the bond - if it's even able to sell it.
To borrow the money, Genest said the Legislature would have to pass an on-time, balanced budget and see the nation's credit market recover by summer. California's last on-time budget was 2006, but that's a rarity. This year's 85-day budget standoff was the longest in state history.
Genest said it is imperative for lawmakers to act quickly, and not just because the state is running out of cash.
If the recession deepens in the months ahead, Genest said it could lead to even greater declines in tax revenue and an even greater budget deficit - forcing deeper spending cuts.
"The longer we wait, the harder and harder it gets," he said.
Even if Schwarzenegger and lawmakers could agree on his budget fix, it wouldn't be the end.
His plan relies on voters approving several measures during a special election sometime in 2009, including the plan to borrow against future lottery revenue and changes to two voter-approved ballot initiatives.
Schwarzenegger says the state could save $227 million by shifting money from Proposition 63, a 1 percent tax on millionaires voters approved in 2004, to pay for basic mental health services. Advocates say the measure was designed to supplement, not replace, state program funding.
He also wants to save $275 million by eliminating the voter-approved First 5 Commission that provides services for children under 5, redirecting all state money and half the money local agencies collect under the program to "high-priority" children's programs run by the Department of Social Services. Voters authorized the commission by passing Proposition 10 in 1998.
Schwarzenegger, who remains on vacation in Idaho, so far has been unable to persuade lawmakers to go along with his budget proposals, and it's not clear whether his latest plan will meet with any more success.
Earlier this month, the governor declared a fiscal emergency and called the Legislature into its fourth special session of the year. He also signed an executive order forcing 235,000 state workers to take two furlough days a month starting Feb. 1 and required a 10 percent cut for state agencies, a step that could lead to thousands of layoffs.
The most recent plan under consideration was a Democratic proposal intended to close the current budget shortfall and make headway on the deficit projected for the 2009-10 fiscal year.
It called for $18 billion in cuts and tax increases, but Schwarzenegger vowed to veto it after it passed the Legislature because he said it failed to include sufficient steps to stimulate the economy.
It also faced a possible legal challenge. Democrats attempted to circumvent the state's constitutional requirement that all tax increases pass the Legislature on a two-thirds vote by claiming their new revenue was a "fee" instead of a tax. Republicans, who opposed the Democratic budget plan, and taxpayer advocates said they would sue if Schwarzenegger signed it.
Assembly Speaker Karen Bass, D-Los Angeles, said Democrats intend to send Schwarzenegger that plan, despite his latest proposal.
"It's completely unacceptable and unnecessary for the state of California to issue IOUs when there's a solution right there that only requires his signature," Bass said in a telephone interview after the governor's two-year fiscal plan was released.
She said Schwarzenegger should endorse the Democratic plan to address the immediate cash crisis and then negotiate a longer-term budget solution.
The proposal Schwarzenegger released Wednesday is similar to one he sent lawmakers this fall.
It would raise the state sales tax from 5 percent to 6.5 percent starting March 1, lasting through December 2011. It also would expand the sales tax to services such as vehicle and appliance repairs and veterinary services, boost taxes on alcoholic drinks and tax oil production in the state.
Schwarzenegger's plan also would decrease the dependent income tax credit and increase vehicle registration fees.
Republicans have refused to raise taxes, but Democrats and the administration says the budget deficit is too great to be addressed by spending cuts alone.
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