A deal struck between Gov. Arnold Schwarzenegger and California legislative leaders Monday evening to close the state's $26.3 billion budget deficit would significantly cut government spending without tax increases.
The plan comes after months of partisan bickering and nearly three weeks after the state began issuing IOUs to thousands of state contractors and vendors.
Among the state's $15 billion budget cuts:
- $6 billion from K-12 schools and community colleges over two years
- $3 billion from the University of California and California State University systems
- $1.3 billion from Medi-Cal, the state's healthcare program for the poor
- $1.2 billion from the state prison system
The government would also scale back on health insurance provided to low-income children and welfare checks issued to the poor.
"This is a sober time; there isn't a whole lot of good news in this budget," said Darrell Steinberg, president for tem of the California Senate. "We've cut in many areas that matter to real people, but we've done so responsibly."
Schwarzenegger, who compared the last few hours of Monday's negotiations to a "suspense movie," called the budget agreement "a great accomplishment."
The deal is a huge win for conservatives, who favor a smaller government, says John Ellwood, a professor at UC-Berkeley's Goldman School of Public Policy. Taking the state back to 2005 spending levels, the plan would shrink general fund spending from $92 billion to $88 billion.
Cuts in government spending might not be fully effective because the state is in an economic free-fall, says Ellwood, who sits on the California Budget Project's board of directors, a liberal think tank.
"Revenues are just collapsing, and there are a lot of gimmicks in this [agreement] because politicians don't like to inflict pain, even conservatives," he says.
With a record number of home foreclosures and an unemployment rate of 11.6 percent, California's financial woes are far from over.
"In the short run it gets us through this year, and in the long run the same problem comes back even worse next year because $10 billion worth of gimmicks has been used that cannot be replicated," says Roger Noll, a Stanford University economics professor.
Noll says the long-term solution is more rational budgeting, which can't occur in the current administration because of 30 years of ballot initiatives by California voters.
"The reality is the system doesn't work, it is going to crash, and the only question is when," he says.
The budget plan also calls for more borrowing from local governments or redirecting of funds that had been earmarked for them.
Under the plan, the state would also launch its first offshore oil project in more than 40 years by expanding oil drilling off the Santa Barbara coast. While opposed by many conservation groups, the project could generate about $100 million in the current fiscal year.
The State Assembly and the Senate are expected to vote on the budget proposal, which needs a two-third approval, as early as tomorrow.
If a budget agreement is not reached, Noll says that the results will be "catastrophic."
"If you don't actually have a budget, the state runs out of cash fairly quickly, and then [the government] would just have to shut down the whole enterprise."
- Read 10 Things You Didn't Know About California's Budget.
- See a gallery of political cartoons.