Talks resume in addressing Calif.'s $26B deficit

[July 11, 2009]  SACRAMENTO, Calif. (AP) -- Gov. Arnold Schwarzenegger and legislative leaders were scheduled to resume work Saturday on bridging California's $26 billion budget shortfall following an unexpected resumption of negotiations the day before.

Late Friday, lawmakers from both parties expressed optimism about the direction of the talks but cautioned that a lot of work remains. That is particularly true in meeting the demands for government reform by Gov. Arnold Schwarzenegger and Republican lawmakers.

"It was the most productive negotiation we have had in weeks," said Senate leader Darrell Steinberg, D-Sacramento. "We still have a ways to go."

The renewal of negotiations comes after a week of partisan infighting that temporarily stalled talks. Assembly Speaker Karen Bass, D-Los Angeles, declined to participate in negotiations Monday because of disagreements with Schwarzenegger's demands for reforms to welfare, pension, health care and in-home supportive service programs.

"Things are moving forward. So I feel much more positive today than I did earlier this week," Bass said Friday.

The governor and lawmakers said they were prepared to work through the weekend.

At issue is their attempt to close a $26.3 billion shortfall for the fiscal year that began July 1. The Legislature passed a budget for the current fiscal year during an unusual midyear session in February, but quickly declining tax revenue threw the spending plan out of whack within weeks.

It's not clear how the two sides will bridge the gap, which represents roughly a quarter of the general fund, the state's main account for paying its daily operating expenses.

The governor initially proposed eliminating welfare and children's health care programs, while heavily reducing in-home care for the elderly and disabled. He backed off those plans but then angered Democrats and welfare advocates when he turned his attention to weeding out what he described as "waste, fraud and abuse" in California's social service programs.

Schwarzenegger continues to seek changes in eligibility and benefits within California's welfare-to-work program, while Democrats want to protect the state's poor and elderly from cuts they say would be crippling.

Revenue is running so far behind spending obligations that sometime in September the state will run short cash to pay for most of its core functions, including contributions to state pension funds. It also could be forced to issue IOUs instead of paychecks to state workers, despite previous court rulings against the practice.

The national recession and a steep drop in tax collections has steered California way off course from the spending plan adopted in February. On Friday, the state controller confirmed that California was billions in the red at the end of the previous fiscal year on June 30.

Controller John Chiang said the state spent $10.4 billion more than it collected last year and is now without enough cash to cover all of its payment obligations.

"California continues to pay for its history of unbalanced budgets," he said in a statement.

To preserve cash, Schwarzenegger ordered public employees furloughed three days a month, shutting many state offices on those days. The controller has begun issuing IOUs to thousands of state vendors to save about $3 billion in July alone, but several major banks stopped honoring them on Friday.

That has left some contractors scrambling for a way to get paid.

At the urging of state Treasurer Bill Lockyer, Citigroup Inc. agreed to a one-week extension and Bank of the West reversed its decision and will continue to cash the IOUs, formally known as registered warrants.

Meanwhile, officials with the largest state employees union said they would ask their members to vote on whether they wanted to strike or take some other action in response to the governor's proposal for additional pay cuts.

The three-day-a-month furloughs translate into a roughly 14 percent pay cut for the state's 235,000 employees.

In response to the union's threat, Schwarzenegger acknowledged the cuts to state government were difficult on everyone, from general taxpayers to state workers.

"The key thing is to recognize that we have a shortfall of $26 billion," he said. "It's a huge drop in revenues. It's historic. We've never seen this before in California."

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Associated Press Writer Don Thompson contributed to this report.

[Associated Press; By JUDY LIN]

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