Assembly approves budget package, but Schwarzenegger says he'll veto it

By Evan Halper and Shane Goldmacher

June 26, 2009 12 AM PT

SACRAMENTO — The state Assembly on Thursday approved $5 billion in budget revisions intended to keep California from having to issue IOUs next week, but Gov. Arnold Schwarzenegger quickly declared the package inadequate and vowed to veto it.

Republicans blocked the measures soon afterward on the Senate floor. But Democrats said they would not abandon the effort to pass the package, which would cut billions from education, push some education costs into the future and defer other state expenses.

The Assembly’s action came despite earlier declarations by GOP lawmakers that they would block any proposals that did not close the entire $24-billion deficit. With the prospects of IOUs going to local governments, welfare recipients and college students as early as next Thursday, Assembly Republicans joined the majority Democrats to pass the measures.

As lawmakers debated, the controller and the state treasurer issued a joint statement warning that IOUs -- if made necessary by California’s cash crunch and the continuing lack of a balanced budget -- would cause “substantial, long term damage” to the state’s standing on Wall Street. Assembly GOP leader Sam Blakeslee of San Luis Obispo said that approving Thursday’s budget bills was “the responsible and prudent thing to do.”

But Schwarzenegger said the $5 billion in budget revisions, which could avert IOUs for much of July, “amounts to nothing more than a piecemeal proposal.”

“Since the first day we began working to solve this $24-billion deficit, I have been clear: The Legislature must solve the entire deficit,” he said. He vowed a veto if the bill package made it to his desk, “because it doesn’t solve the problem.”

Several GOP senators then met with the governor in his office. Republicans in the Senate subsequently blocked the package.

Senate President Pro Tem Darrell Steinberg (D-Sacramento) accused the governor of “engineering the Senate Republican efforts,” a charge denied by that house’s Republican leader, Dennis Hollingsworth (R-Murrieta).

Steinberg, who earlier this month received a gift of metal bull testicles from Schwarzenegger with a note suggesting he might need them to close a budget deal, accused Schwarzenegger and Hollingsworth of “machismo game-playing.”

Some of the measures the Assembly approved would save money only if the legislation is enacted before Tuesday, when the current fiscal year ends. After that point, the billions of dollars in payments to schools will have been made.

In addition to the multibillion-dollar education cuts, the Assembly package would defer $3.6 billion owed to schools, universities and transportation programs. It also would shift $350 million away from local redevelopment agencies and borrow $360 million from the state lottery. Voters in May rejected a proposal to borrow substantially more from the lottery.

Also on Thursday, the governor rejected a tentative deal his prisons chief struck last month with a court-appointed receiver in long-running federal lawsuits brought by inmates seeking better healthcare. The deal would have required the state to spend nearly $2 billion constructing prison medical facilities. “We cannot agree to spend $2 billion on state-of-the-art medical facilities for prisoners while we are cutting billions of dollars from schools and healthcare programs for children and seniors,” Schwarzenegger said.

The governor’s decision sets up a potential confrontation with federal judges who have sharply criticized his administration for moving too slowly. The judges have linked inmate healthcare problems to prison overcrowding and have said they intend to relieve it by ordering the release of about 50,000 inmates.

Another federal judge, meanwhile, ordered the governor and lawmakers not to implement a planned $2 per hour wage cut for the state’s hundreds of thousands of in-home healthcare workers. The administration has been tangling with the Service Employees International Union, which represents most such workers, over the wage cut, which was approved in February and is scheduled to take effect next week.

The union appealed to the White House and federal officials, who temporarily threatened to rescind billions of dollars in stimulus money if the state did not reverse the $98.1-million cut. The White House later rescinded the threat, saying it was issued unintentionally on a draft document not meant to be circulated.

But U.S. District Judge Claudia Wilken ruled Thursday that the wage cut violates federal law, and she issued an injunction prohibiting the state from putting it into effect.

California Department of Finance spokesman H.D. Palmer said the state will ask for a stay of the judge’s order as soon as possible.

“We fully expect this to be overturned on appeal,” he said.

As the state’s financial problems intensified, Wall Street slapped California with another downgrade of its credit, the first of what financial experts expect could be several this summer.

Fitch Ratings lowered the state’s bond rating from A to A- and warned that further downgrades may come. Fitch said the reduction reflected a belief that “the state’s finances will continue to be strained through fiscal year 2010 and beyond, regardless of any likely outcome to the current budget impasse.”

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shane.goldmacher @latimes.com

Times staff writer Michael Rothfeld contributed to this report.