WSJ: CALIFORNIA CLOSE TO NEW BUDGET DEAL

By STU WOO | The Wall Street Journal

JULY 16, 2009 - California leaders say they are near a compromise on fixing the state's $26 billion budget shortfall, signaling the end of a weeks-long impasse that has forced officials to issue IOUs to keep the state out of default.

Gov. Arnold Schwarzenegger and legislative leaders have held negotiations late into the night this week to work out the last details of a budget plan, which staffers said could be finalized as soon as Thursday morning. "We're close," said Matt David, a spokesman for the governor. "There are still some details to be worked out."

Mr. Schwarzenegger and legislative leaders have agreed on $14 billion to $15 billion in spending cuts, with about a third of that in education, said staffers for the two sides. The remaining $11 billion gap would be closed through one-time fixes and accounting gimmicks -- such as issuing state workers' paychecks in July 2010 instead of June 2010 to save money for the current fiscal year -- despite the Republican governor's repeated demands for a lasting overhaul of spending.

Several controversial plans are still on the negotiating table, Mr. David said. Among them are the governor's proposals to scale back welfare programs, eliminate a college-scholarship program, close all state parks and borrow $2 billion from local governments.

The nation's most-populous state faces a $26 billion deficit in its $92 billion general-fund budget through June 2010. In February, lawmakers closed most of a $42 billion gap for fiscal years 2009 and 2010 through steep spending cuts and new taxes.

Budget stalemates are familiar in Sacramento, which has seen only a handful of spending plans passed on time in the past 30 years. But with the state on the brink of insolvency this year, this impasse has been far more costly.

Lawmakers missed a June 30 deadline to pass spending cuts, preventing them from reaping $3 billion in savings during the fiscal year that ended that day. That also forced the state controller to begin issuing IOUs to keep the state from running out of cash by July's end. The controller's office said it had issued 130,501 IOUs, worth a total of $588.1 million, by the end of Tuesday. The state will have to pay interest on the IOUs, while investors will charge California more for its annual short-term borrowing.