Published: Friday, 24 Jul 2009 | 6:17 PM ET

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The state Assembly has approved a plan to close most of California's $26 billion budget deficit, sending the package of financial fixes to Gov. Arnold Schwarzenegger.

The Assembly rejected two of the most controversial measures, a plan to take about $1 billion in transportation funding from local governments, and allowing oil drilling off the California coast for the first time in 40 years. That was to have brought in $100 million this fiscal year.

Photo by: scazon

The loss of $1.1 billion from the budget package essentially eliminates the $900 million reserve fund Schwarzenegger negotiated with Democrats and Republicans.

That will force him to use his authority to make even deeper cuts to close the gap.

Earlier Friday, the California Senate approved a plan to close the deficit, providing a glimmer of hope after weeks of fiscal gloom.

The complex legislative package of 31 bills then remained stalled for hours as Assembly leaders struggled to secure enough votes to pass several measures, repeatedly stopping discussion to huddle in groups.

Senators started their session Thursday evening and worked through the night to get enough votes to pass the more controversial measures, including three that took or borrowed billions of dollars from cities and counties.

Senate leader Darrell Steinberg, D-Sacramento, said lawmakers could take pride in dealing with difficult budget decisions during an unprecedented economic collapse.

"And California is still standing," he said moments after the final vote.

But a half-day after the Senate started summer vacation, the 80-member Assembly remained bogged down in disputes over taking money from local governments, repaying schools billions of dollars once California's economy picks up and permitting the first new oil drilling off the state's beaches in more than 40 years.

Gov. Arnold Schwarzenegger and the Democratic and Republican leaders of each house announced the compromise plan Monday after weeks of political wrangling.

The deal eliminates nearly 60 percent of the deficit with spending cuts to core state services such as education, state parks and prisons.

• Special Sessions on Budgets Costing States Big

The rest is reached by one-time raids on local government funding and accounting maneuvers, such as deferring state employee paychecks by one day for a savings on paper of $1.2 billion.

Even that relatively non-controversial bill was stalled as Assembly leaders worked to get backing from reluctant fiscal conservatives.

Both legislative houses quickly passed a key bill with cuts to higher education, college grants, health programs, welfare, in-home supportive services and state prisons. But measures aimed at filling the rest of the deficit proved more difficult.

Some required two-thirds approval, meaning they needed support from a handful of Republicans, the minority party in each house.

That vote threshold was proving to be an obstacle, with Republicans refusing to support a bill that would repay schools for funding cuts in previous years.

Watched closely by hovering television news cameras, weary lawmakers milled around the Assembly floor or caught some fresh air on a balcony as they waited for someone to blink Friday afternoon.

Legislative leaders of both parties have acknowledged the budget solution is imperfect and cuts deeply into basic programs, including education, prisons, health care and welfare. But they say it is vital to address the state's cash-flow crisis.

California's budget shortfall represents nearly 30 percent of its $92 billion general fund. The revision under consideration Friday would bring total spending down to about $88 billion, returning to 2005 levels.

The nation's most populous state has been hammered by the worldwide recession, leading to a steep plunge in income, sales, property and capital gains taxes.

The cash crisis and the lack of a balanced budget have forced the state to issue IOUs to thousands of state contractors and vendors. Closing the shortfall is expected to allow the state to obtain short-term loans, eventually ending the need for IOUs.

The rapid decline in tax revenue and Republicans' insistence on no tax increases left the state with few options.

In an interview Friday on MSNBC-TV, Schwarzenegger said he wouldn't call the still-unapproved package a win.

"When people have to struggle and suffer because of those kind of cuts, you can't declare victory," he said. "I think what we have done is steered away from the iceberg and we are coming out of it and we're going to rebuild California as quickly as possible and get our economy back."

The attempt to take or borrow nearly $5 billion from cities and counties over two years became one of the most difficult issues.

Several big-city mayors criticized the raids Thursday and said at least 130 local governments have agreed to sue the state to block the transfer of some money.

Under the budget package, the state would borrow $2 billion from local governments' property tax revenue and repay it with interest within three years. It would take another $1 billion in redevelopment money and nearly $2 billion over two years in local transportation funds — a measure Assembly leaders were considering rejecting Friday.

Facing withering criticism from counties and cities, the legislative leaders early Friday agreed to alter part of the plan, committing to repay the transportation money over 10 years rather than take it outright.

"Some of my counties, where they have rural roads, this money is all they have," said Sen. Lois Wolk, a Democrat from Davis who opposed the raid on transportation money, which passed with the bare majority needed.

Many Democratic lawmakers also criticized a provision authorizing an expansion of oil drilling off the California coast in exchange for royalties. They said it amounted to an end run around the public review process and would invite legal challenges.

The budget package also included reforms to welfare and social service programs that Republicans believe will save the state money in the years ahead.

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