Schwarzenegger must find way to close $20B deficit

SACRAMENTO, Calif. (AP) - Having had little success achieving long-term budget reform, Gov. Arnold Schwarzenegger on Friday is expected to reveal a patchwork plan for closing yet another huge budget deficit for California.

He likely will propose more spending cuts, requests for billions of dollars in additional federal aid and tax changes to address a shortfall projected at $20 billion through June 2011.

The deficit promises to dominate his final year in office.

The Republican governor previewed parts of his budget proposal during his State of the State address earlier this week, pledging to protect California's public schools and colleges while demanding a better return on federal funding for health care and incarcerating illegal immigrants.

"We no longer can ignore what is owed to us," Schwarzenegger said.

He and lawmakers are trying to avoid a repeat of last summer, when they could not agree on how to solve a then-$26 billion budget deficit. Failing to close the shortfall until well after the state's deadline to pass a spending plan forced the state to delay tax refunds, withhold payments to local governments and issue IOUs to thousands of vendors.

Several of the changes to which Schwarzenegger agreed last year have since crumbled, including the sale of a portion of its workers compensation insurance business for $1 billion and making prison and health care cuts, opening a $6.6 billion gap in the current year's budget. The gap between tax revenue and spending obligations is projected by the administration to be $13.3 billion in the fiscal year that begins July 1.

State Controller John Chiang said there are no more easy spending cuts to be made as federal stimulus money begins drying up later this year. He said many of the one-time solutions adopted in the last budget pushed more problems into the future, despite Schwarzenegger's oft-repeated pledge to stop "kicking the can down the alley."

"We are a year older, and I hope we are a year wiser," Chiang said in a statement.

Schwarzenegger's budget proposal is expected to include threats of more government worker furloughs, elimination of social programs for the poor and the suspension of corporate tax breaks that were scheduled to take effect soon.

The administration also is likely to revive some proposals that failed last year, such as authorizing additional oil drilling off the Santa Barbara coast.

Schwarzenegger points out that California receives about 79 cents for every dollar it sends to Washington, D.C., in federal taxes. In a Dec. 22 letter to House Speaker Nancy Pelosi, he threatened to eliminate some social services, such as the in-home care program for frail seniors and the disabled, unless the federal government increases California's reimbursement for state Medicaid programs, known in California as Medi-Cal.

CalWORKS, the state's main welfare program, also could be eliminated.

Schwarzenegger's criticism of the federal government drew a sharp response from Democratic U.S. Sen. Dianne Feinstein, who said the governor was looking to blame someone else for the state's problems.

If the federal government does not provide the extra money, the administration would seek to delay by one year tax breaks for large corporations that were awarded during recent budget negotiations, said a government source who has been briefed on the budget proposal but was not authorized to speak publicly about it.

The business-friendly moves were negotiated as part of recent drawn-out budget fights to get enough Republican votes to pass the budget.

They involve changing the way the state would calculate corporate taxes, moving toward a formula referred to as "single sales factor." The formula determines companies' tax liability based on where they make their sales instead of where they operate or employ workers.

The formula could cost the state as much as $750 million a year in tax revenue.

Another tax break involved allowing businesses to deduct more operating losses beginning in 2011. The expansion of net operating loss deductions has been estimated to cost the state $265 million in the 2010-11 fiscal year, $485 million in 2011-12 and similar amounts thereafter.

Senate President Pro Tem Darrell Steinberg said Democrats favor rolling back tax breaks and credits that have not proven to create jobs, as was argued by Republicans to include them in prior budgets.

Administration officials refused to discuss the governor's pending budget proposal.

In his State of the State address, the governor promised to protect California public schools and colleges, which have been subject to billions of cuts in recent years, and proposed a constitutional amendment to prevent the state from spending more on prisons than higher education.

To make good on his education pledge without imposing new taxes, Schwarzenegger will try to eliminate the sales tax on gasoline, which provides funding for transportation and public transit projects, according to the source who was briefed on the budget negotiations.

By replacing the gasoline sales tax with an excise tax, the administration would gain greater flexibility in how to spend the money.

Senate Minority Leader Dennis Hollingsworth, R-Murrietta, said there should be no "sacred cows" in filling the deficit.

"As painful as it is, we ought to be looking at every area of government," Hollingsworth said. "Nobody wants to cut education, but at the same time, we've got to be smart about that."

Schwarzenegger also laid out a $500 million program designed to create jobs and retrain workers, to be paid for with a state fund that currently has a surplus. He will seek to streamline permits for construction projects, extend last year's $10,000 homebuyer tax credit for first-time buyers and exempt manufacturing items bought by green technology companies from the state sales tax.

Democrats vowed to fight back on corporate giveaways and rolling back environmental standards. They also pledged to protect welfare programs.

"Those programs are needed more than ever," said Assemblywoman Noreen Evans, D-Santa Rosa, chairwoman of the Assembly Budget Committee.

Evans said a part of the jobs package involves giving employers a tax break using a loan from the Unemployment Compensation Disability Fund, a special fund designed to cover wages lost when a worker becomes unemployed because of sickness or injury.

"It makes me very uneasy to take unemployment money and giving it to employers," Evans said. "And if there's a surplus in these times, we need to ask, why?"

Steinberg said the governor can use already approved bonds and existing federal stimulus money to promote job creation in California.