Politics

SACRAMENTO (CBS 5 / AP) ― Gov. Arnold Schwarzenegger said Monday evening that he would not sign a compromise budget deal California lawmakers were expected to vote on — unless they include his requests for a stronger savings account.

The state Senate and Assembly scheduled floor sessions late Monday to conside the plan to end the state's longest-ever budget stalemate. The compromise proposal included increasing the paycheck withholding for state income taxes.

The withholding provision was one of several steps lawmakers used to close a $15.2 billion deficit without borrowing or new taxes. They acknowledged the proposal would get the state through its current fiscal year but not solve California's ongoing fiscal problems. 

Rank-and-file lawmakers scrambled to understand the compromise that was announced Sunday afternoon, while Republican and Democratic leaders sought to revise the language in a way that would assure the bill's passage. 

The budget requires a two-thirds vote in both houses so it can be sent to the governor, who indicated he would not sign the plan in its original form.

In a letter to four legislative leaders, Schwarzenegger said he would not sign the budget unless it includes a stronger rainy day account that could be tapped in years when revenue declines.

The budget proposal includes $7.1 billion in spending cuts and fills the remaining gap by moving up tax collection deadlines and closing some tax loopholes. Those maneuvers will generate $9.3 billion, leaving a small reserve for unanticipated expenses.

A large portion of the revenue depends on increasing income tax withholdings by 10 percent for working Californians, a move that would raise $1.6 billion. It also would require those who pay quarterly taxes - including limited-liability corporations and wealthier Californians - to pay 30 percent of their taxes in each of the first two quarters of the fiscal year instead of 25 percent. That move would generate $2.3 billion.

Tax experts said the result of higher withholdings will mean less take-home pay for many workers. Taxpayers can adapt by adjusting withholdings once the change takes effect, said Lenny Goldberg of the California Tax Reform Association.

"It's really about timing," he said. "It will come out of people's take-home pay, and they will end up getting a bigger refund in April ... We don't know if people will increase their dependents to avoid it."

Assembly Speaker Karen Bass said the $104.3 billion general fund spending plan does not address California's long-term difficulty in balancing spending with revenue. But the Los Angeles Democrat said it was important for lawmakers to finish work on the budget for the current fiscal year, which began July 1.

During the impasse, Republicans have refused to raise taxes on corporations and the wealthy, as Democrats had proposed. The impasse continued despite Schwarzenegger's offer to increase the state sales tax 1 cent for three years.

"At the end of the day, we weren't able to raise the revenues we wanted," Bass told reporters Monday. "But we were able to close significant budget loopholes that is giving us revenue in this budget year that prevent us from having to make the draconian cuts."

The agreement was reached by the Legislature's Democratic and Republican leaders, who were pitching it to their respective caucuses ahead of the floor sessions.

The cuts include many of those the governor proposed in his May budget revision, although Democrats rejected what they considered the worst of those cuts. They did not want to reduce foster care funding or kick children off welfare if their parents don't find work within five years.

Under the latest plan, the state would restore nearly all the 10 percent cuts to doctors, dentists and nurses providing care under Medi-Cal, the state's health insurance program for the poor. Those rate cuts, which had been adopted in February, will be restored starting in March 2009.

Without taxes, legislative leaders agreed to generate one-time cash by moving up tax collection deadlines and closing some tax loopholes.

The compromise includes temporarily suspending tax deductions for business losses, borrowing from special funds, granting a tax amnesty and closing the infamous "yacht tax" loophole. That allowed people to avoid paying state sales tax on boats, RVs, airplanes and other large luxury items if they took possession of them out of state and kept them there for more than 90 days.

Interest groups that have been briefed on the compromise plan said it would increase the state's rainy day fund from 5 percent to 10 percent of the general fund budget. It also would allow the governor to cut up to 7 percent from state operations when revenue comes in lower than expected, but would exclude cuts to education and health and human services, two of the state's biggest areas of spending.

The governor also would have the ability to impose a four-month freeze on cost-of-living increases for benefits.

In his letter, Schwarzenegger told legislative leaders he would not sign the budget unless lawmakers include his requests for a strengthened rainy day fund.

The governor has been stumping statewide for long-term fiscal reform and had said he would not sign a budget that fails to include it.

He wants 3 percent of general fund revenue to be automatically deposited into the rainy day account each year, stopping only when the account reaches 12.5 percent of the general fund. Schwarzenegger also wants assurances that the fund could be tapped only when revenue falls below projected spending.

Some provisions of the plan will require voter approval, likely through a special election. Those include the changes to the state's rainy day formula and a $10 billion plan to borrow against future lottery revenue.

Should voters reject the lottery proposal, it would leave a $5 billion hole in each of the next two fiscal years.

"It not only delays the day of reckoning, it makes it worse," said Michael Herald, a lobbyist for the Western Center on Law and Poverty. "It's going to accelerate revenues in the upcoming budget year, which are going to force us to have to make severe reductions in the 2009-10 year."

(© 2009 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)