California budget perpetuates deficit spending

California's financially shaky spending plan is not expected to hold for long after Gov. Arnold Schwarzenegger signs it.

The Legislature passed a budget Friday morning to end a record-setting 100-day impasse, and the governor is expected to sign it soon.

But the budget is so tenuous that the next governor already is expected to face a multibillion dollar shortfall by the time he or she is sworn in this January.

According to the Legislative Analyst's Office, two-thirds of the steps taken to bridge the $19 billion deficit are based on one-time or temporary money, some of which may never materialize.

The budget for the current fiscal year has no tax increases but relies on a combination of cuts, funding shifts and assumptions about money the state hopes to receive.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

SACRAMENTO, Calif. (AP) — California lawmakers finally sent a financially shaky budget to Gov. Arnold Schwarzenegger early Friday, putting the state on track to start paying long-overdue bills but likely punting the state's deficit problems to the next governor.

Senators voted 27-9 in favor of the main bill in a legislative package aimed at ending a 100-day budget impasse and bridging a $19 billion budget deficit. They followed a 54-1 Assembly vote on Thursday. The bill, SB870, cleared both chambers with the bare two-thirds majority needed for passage.

"This is not a celebration, because of the difficulties of the times and the decisions that we've had to make. But it is a relief," Senate President Pro Tem Darrell Steinberg said when the budget passed, about 19 hours after the Legislature convened on Thursday.

Schwarzenegger helped negotiate the budget deal, which includes no new taxes or fees but includes pension and budget reforms he has long sought. The governor said he hoped staff could get him the budget to sign by late Friday so the state can begin the short-term borrowing it needs to resume paying thousands of contractors and continue with infrastructure financing.

Schwarzenegger said he planned to use his veto authority to cut an additional $965 million from the budget.

"These are sobering times. ... I'm proud that we used this crisis as an opportunity to pass major reforms that would help ensure we will never have to suffer through a crisis like this again," he said.

While lawmakers hailed the budget's passage, they acknowledged they may soon have to deal with the fallout from relying on optimistic economic forecasts and accounting maneuvers.

"This budget will have a $10 billion deficit next year," predicted Sen. Jeff Denham, R-Merced, during the budget debate.

Sen. Denise Ducheny, D-San Diego, who chairs the budget committee, countered that the spending plan will "allow us to continue to inch our way out of this recession."

"It is time for the state to get everybody paid, to pay the vendors, to reopen the child care centers, and to allow the state to move forward," Ducheny said.

California has been without a budget since the July 1 start of the current fiscal year, a delay that has left the state on the brink of issuing IOUs and cutting off funding for road projects.

The budget package contains no new taxes or fees, and just 40 percent of the gaping deficit would be closed by additional spending cuts. The rest would be addressed through rosy revenue assumptions and creative accounting.

The plan also counts on the state receiving $5.3 billion from the federal government, far more than it has received so far. Schwarzenegger said his administration will continue to work with the federal government to secure funding owed to California.

The budget also assumes a statewide economic recovery that will generate an additional $1.4 billion in tax revenue.

If those assumptions fall short, the difference will be added to the budget deficit that will greet Schwarzenegger's successor in January.

Steinberg acknowledged the state's spending will likely have to be revisited in coming months. "We know we'll be back at it, but we also get a fresh start — a new legislative session and a new governor," he told reporters.

Under the deal, nearly $2 billion in payments to K-12 schools and California's community colleges would be delayed until the next fiscal year.

The budget lets Schwarzenegger claim victory in two of the three areas of reform he demanded as a condition of signing a spending plan.

Lawmakers agreed to ask voters in 2012 to approve a larger rainy day fund to build a cash reserve for future economic downturns. They increased the maximum size of the fund from 5 percent to 10 percent of general fund revenue.

The legislative leaders and most of the state's public employee unions also agreed to pension reforms that included higher retirement ages for state employees hired after Nov. 10 and higher contribution rates for all state workers.

"For six years I've been fighting for those reforms and let me tell you, it's tough when you try to reform things. It has been hard and often, downright ugly," Schwarzenegger said. "But these reforms are necessary."

The budget plan does not include the tax changes the governor had sought, including recommendations released last year by a commission created by the governor and Democratic leaders. Schwarzenegger spokesman Aaron McLear said the governor will keep pushing for tax changes he believes are needed to solve California's long-term budget imbalances.

The national recession has forced lawmakers and the governor to make tens of billions of dollars in spending cuts in the past two years as state tax revenue plummeted. This year's $19 billion deficit amounts to more than 20 percent of the state's $87.5 billion general fund, which was as high as $103 billion as recently as the 2007-08 fiscal year.

As lawmakers worked toward a final deal, the state's ability to meet its financial obligations was a mounting concern.

The state needs a signed budget to start borrowing money to bridge the cash shortage that is typical each fall before the springtime influx of tax revenue, said Joe DeAnda, a spokesman for the state treasurer's office.

The late budget also is making it more difficult for the state to issue long-term bonds to support $7 billion worth of public works projects this fall, he said.

The state controller's office plans to announce Friday if California will need to issue IOUs for lack of cash.

The budget's final passage was delayed in large part because the Senate was short five members.

Senators Jenny Oropeza, D-Carson, and Patricia Wiggins, D-Santa Rosa, were absent due to long-term illnesses. Sen. Rod Wright, D-Inglewood, had to leave early to attend a court appearance on charges alleging that he lived outside his Southern California district since he was elected two years ago. Sen. Sam Aanestad, R-Grass Valley, was absent for undisclosed reasons, and the late Sen. Dave Cox, R-Fair Oaks, has yet to be replaced.


Associated Press Writer Judy Lin contributed to this report.