Monday, December 1, 2008

What will it take to break Capitol budget gridlock?

SACRAMENTO — As the Legislature's latest attempt to fix the state's fiscal mess ended once again in a bout of partisan sniping and no visible progress, something surprising happened: Hints began to emerge of the possible contours of a compromise.

All year, Republicans have refused to entertain raising taxes, without which Democrats and Republican Gov. Arnold Schwarzenegger insist the state's massive deficit — $28 billion through mid-2010 — can't possibly be closed. At least a handful of GOP votes are needed because of California's two-thirds supermajority requirement to increase taxes.

That opposition continued when the governor called lawmakers back to Sacramento this month for an emergency session of the Legislature to tackle the deficit.

At the same time, Republican leaders began to signal that a deal might be had at the right price — but at a price that would force Democrats to alienate some of their key supporters.

Specifically, GOP lawmakers are pressing for a slate of measures that they say would take the sting out of any tax increase.

They include relaxing laws governing overtime and lunch breaks; easing environmental regulations for new land developments; and enacting tax credits to encourage job creation.

"Republicans truly believe that raising taxes will hurt the economy," said Jennifer Gibbons, a spokeswoman for Assembly Minority Leader Mike Villines, R-Fresno. "So for us to even Advertisementconsider raising taxes, we'd need to know measures are being taken to mitigate" that.

Republican Gov. Arnold Schwarzenegger sides with Republicans on the issue, calling in his latest budget proposal for a package of tax breaks, including one to help film and TV producers. But the governor also agrees with Democrats that higher taxes can't be avoided: His budget plans calls for a temporary boost in the sales tax, among other tax hikes.

As negotiations resume next month, the GOP's demands are likely to take center stage. And what Republicans label economic stimuli, Democrats and liberal interests dismiss as handouts to businesses.

The proposals, they argue, would do nothing to fix the state's fiscal crisis.

"It's a way to help corporations make a little more money," said Art Pulaski, Executive Secretary-Treasurer of the California Labor Federation.

One GOP idea would ease the rules for when employers are required to pay overtime. Currently, hourly employees are entitled to time-and-a-half pay after eight hours in a day; the change would mandate overtime only if a person worked more than a certain number of hours over an entire pay period, say more than 40 hours over one week or more than 80 hours over two weeks.

"Let's ease off some of the regulations that make it tough to do business in California," said Schwarzenegger Tuesday evening.

Said Pulaski: "You can call it economic stimulus, but it's a pay cut for workers."

Republicans are also calling for a strict cap on state spending, so annual expenditures could grow by no more than about 5 percent each year. The proposal would have to be approved by voters, possibly in a special election next year.

"We have not shut down one program," Assemblyman Chuck DeVore, R-Irvine, said during one recent budget debate. "Everything grows, year after year, like clockwork."

Democrats call the spending cap proposal a smokescreen to starve government programs of funding over time.

But as the state's fiscal crisis intensifies, pressure will likely mount to accede to at least some of the GOP demands. Already there is some sign of that: This week Democrats voted to cut billions of dollars for public schools and aid to the needy in return for a tripling of the vehicle license fee, but the plan died in a near party-line vote.

"I don't know at what point this game of chicken ends," said Larry Gerston, a San Jose State University political science professor. "But clearly the cost of inaction is growing higher and higher."

The budget deficit has soared to $28 billion through mid-2010. California may be forced to issue IOUs in the spring, lacking cash to pay some of its bills. The state unemployment fund is on course to run dry early next year thanks to rising layoffs.

In one sign of how serious the situation has become, state finance officials have been meeting recently to discuss to whom they can issue IOUs this spring should the state's cash reserve get too low.

If legislators continue their standoff into the spring, the state may not be able to make payroll come the start of the next fiscal year in July, said Mike Genest, the governor's finance director.

"It's beyond frustrating and truly sad to see the great state of California brought to this," Genest said in an interview. "There's only so much we can do to delay the day of reckoning and we're just about out of tricks. We need the Legislature to act."

Lawmakers will soon have another chance. On Tuesday, the governor said he will call another special session in December, when the next class of legislators will be sworn in.

"It has to be done now," Schwarzenegger said, "because we are running out of cash."

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