The long, hard-fought state budget negotiations came to a successful end early Thursday morning, when the Legislature passed a budget designed to address the current fiscal year deficit, and head off a deficit in the fiscal year that begins on July 1. Gov. Arnold Schwarzenegger is expected to sign the bill package today.

The budget package consists of actions over the next 17 months that comprise what the Governor calls "a four-legged stool": fiscal measures to increase revenues through temporary tax increases and borrowing from existing funds; reductions in current spending; various "economic stimulus" measures, including CEQA exemptions for state surplus property and changes in labor rules on some types of infrastructure projects; and reforms designed to "make government more efficient.

In sum, these include $14.9 billion in reductions, $12.5 billion in temporary tax increases, $11.4 billion in borrowing and a reserve of $1 billion. New taxes include increasing the state sales tax by 1 percent; and increasing personal income tax rates by 0.50 percent (which could be reduced, depending upon the level of federal economic stimulus funds received by the state). The package also increases the vehicle license fee from the current 0.65 percent, to 1.15 percent, of which 0.15 percent is dedicated to fund local public safety programs (approximately $500 million annually). The package will also reduce the dependent credit Californians are allowed to claim on their taxes.

The package transfers, for two years approximately $460 million in tax revenues from Proposition 63 (tax on millionaires for mental health services). It transfers approximately $1.4 billion over four years from Proposition 10 (tobacco tax for early childhood education programs championed by then-actor Arnold Schwarzenegger) for state programs with similar objectives. The budget also assumes that the state will borrow about $5 billion that will be securitized by a lottery modernization proposal passed as part of the initial 2008-09 budget (pending voter approval).

All the tax increases and borrowing would be in place for only two years. The tax increase proposals are contingent upon various triggers linked to the successful passage by voters of another critical piece of the budget package: an improved state reserve fund and a spending cap designed to impose greater discipline on spending when state revenues spike. That measure will be placed on the May 19 ballot along with the tax and borrowing measures.

Breaking the Logjam. The final budget package came together when Senate President Pro Tempore Darrell Steinberg (D-Sacramento) was able to win approval from his caucus for reforms sought by Sen. Abel Maldonado (R-Santa Maria). With these reforms, Maldonado agreed to provide the crucial 27th vote to achieve the two-thirds super-majority needed to pass the budget in the Senate.

Measures sought and won by Maldonado included constitutional amendments to establish an open primary system and ban legislative pay increases during deficit years. Both proposals will be placed on the June 2010 ballot for voter approval.

The early morning negotiating session also eliminated a proposed 12-cent increase in the gas tax that had been proposed to be primarily used to offset existing state transportation debt service. The $2.1 billion that the gas tax was estimated to raise through June 2010 will be replaced with a 0.25 percent increase in the state income tax rate, and federal stimulus dollars.

Maldonado also sought but did not win approval for a "no budget-no pay" rule for legislators during periods when the budget is late.

Budget Cuts Will Be Felt Statewide. As we reported last week, this is a difficult budget, with cuts that are deep and painful. Key cuts include $8.4 billion for K-12 education; 10 percent for UC and CSU; 10 percent for the Corrections Department’s medical budget; and elimination of cost-of-living increases for CALWorks and SSI-SSP recipients. The budget includes state furlough provisions estimated to save the state $1.4 billion, reductions in overtime, and elimination of some state holidays. The budget also reduces state funding for local public transit agencies.

What the Budget Means for Cities. City officials facing their own difficult budgets will be relieved to know that the final package appears to leave cities’ revenues largely intact. Specifically, the package does not suspend Proposition 1A protections for local property and sales tax, nor will it shift or borrow additional funds from redevelopment agencies. Furthermore, it will preserve local public safety funds (COPS, juvenile justice and booking fees).

City officials understand very well that this was a very difficult budget for our state leaders to negotiate. They faced enormous challenges: declining revenues, an on-going imbalance between revenues and budgeted expenditures, and the complications of our own state constitutional constraints.

Voting for this budget was difficult for legislators on both sides of the aisle. But it was a necessary vote to bring both certainty and closure to Californians. Passage of this budget compromise helps ensure that California is better positioned to participate with the federal government in re-investing in our people and our infrastructure.

City officials can now proceed with a greater certainty about managing their own resources, and solving their own fiscal problems without the immediate risk that the state will deepen the local fiscal problems by taking local revenues. The state can once again pay its own bills, issue tax refunds, and authorize the release of voter-supported state infrastructure bond funds to work on local transportation and housing projects.

The League encourages city officials to thank the Governor and our legislators for their hard work and leadership.

More Details to Come. As we go to print, many of the budget-related bills are not yet in print. The League will produce a detailed analysis of the budget package, once complete information is available. (For a listing of the budget bills, see also "Budget Package Measures".)