October 7th 2010

Wyatt Buchanan, Chronicle Sacramento Bureau

Thursday, October 7, 2010

(10-07) 04:00 PDT Sacramento

The Legislature is scheduled to vote today on an $87.5 billion general fund budget that lawmakers say not only erases a $19 billion deficit but includes $1 billion more in spending than the previous year.

The scheduled vote on the spending plan comes 99 days after the start of the fiscal year, and lawmakers say California residents can breathe easy: There will be no new taxes and state services will not be severely reduced or eliminated as in past years.

Instead, the $19 billion deficit is largely plugged with what lawmakers call solutions and creative accounting tactics, some of which push off payments to the next fiscal year. And the increase in spending is made possible by an increase in revenue, officials said.

But lawmakers have not released anything more than an outline of the plan, despite pledges to make the budget process transparent. Officials said that the plan closely resembles a proposal that was rejected in an August vote.

State Sen. Denise Moreno Ducheny, D-San Diego, chaired a budget committee hearing on the plan Wednesday. "The economy is doing a slow and steady recovery and this budget reflects that," she said, adding that the plan helps to "stop the bleeding" from cuts of the past two years.

The hearing was the first public airing of the plan, which has been discussed behind closed doors for weeks by the governor and four Democratic and Republican leaders. Wednesday's hearing lasted only about 45 minutes and no testimony was taken from the public in the packed committee auditorium. Lawmakers asked few questions.

Most other members of the Legislature have yet to see the new plan, and some of the actual budget language may not be printed in the form of a bill until this morning, when both houses are to vote on the plan.

Spending on education

At the hearing, state officials outlined some of the major pieces of the budget. It includes $52.5 billion for K-12 education and community colleges, though nearly $2 billion of that won't be given to schools until the next fiscal year.

The formula that determines education spending will be suspended for the year, which is allowed by law, but Democratic lawmakers argue that doing so actually strengthens school funding in future years. Per-pupil spending would increase, they say.

Many of the major cuts called for by Gov. Arnold Schwarzenegger and Republicans in their budget proposal, including elimination of the state's welfare-to-work program and a major reduction on spending for in-home care for the elderly and disabled, are not part of the final deal.

The welfare program, CalWORKS, will not be cut and, while there is $190 million in the budget for providers of the In-Home Supportive Services program, that largely will be reimbursed by federal money. The program will be reduced by $35 million, which amounts to cutting worker pay by about 3.6 percent.

Most state-funded child care services that Schwarzenegger wanted to eliminate also are retained in the plan.

For the University of California and California State University systems, the budget plan provides $5.5 billion, which is more than the previous year, along with nearly $200 million to each system to make up for previous cuts.

Lillian Taiz, president of the California Faculty Association and a professor of history at Cal State Los Angeles, praised the budget plan and in a statement called it "a welcome change of trajectory for the 23 California State University campuses."

State prisons would see about $820 million cut from inmate health care.

Pension cuts

The budget includes proposals to reduce pension benefits for new employees and to put a measure on the November 2012 ballot to shore up the state's rainy-day fund, which has been depleted.

But the spending plan also relies on the federal government giving $5.3 billion to the state, though not all that money has been promised, a rosy assumption of state revenue and a highly criticized plan to sell 11 state office buildings that would then be leased from the new owners.

The budget plan continues the suspension of a corporate tax break worth $1.2 billion over two years. That tax break allows companies to report losses from previous years to offset profit in subsequent years, and thus lower the amount of tax they owe.

There is an explicit exception to that suspension, however, for Humboldt Redwood Co., which is owned by the three sons of the late Donald Fisher, who founded Gap Inc. and contributed to civic causes in San Francisco along with Republican campaign efforts.

Sandy Dean, the chairman of Humboldt Redwood and a friend and business partner of the Fisher family, defended the tax break, worth $20 million to $30 million, as a remedy for losses sustained by the company when tax laws were changed in 2008.

The tax code was changed, Dean said, just after the company had completed the $500 million acquisition of more than 200,000 acres of Humboldt County's most valuable redwood timberland. The land was part of a reorganization plan during bankruptcy proceedings by Pacific Lumber Co.

"Had we known about this tax in advance of the reorganization, we would have had to abandon our effort," Dean said.

The reorganization plan by Dean and the Fishers not only saved 200 jobs and kept a sawmill in Scotia open, but it implemented for the first time in the area sustainable forestry practices and the preservation of old growth redwoods.

Chronicle staff writer Peter Fimrite contributed to this report

E-mail Wyatt Buchanan at wbuchanan@sfchronicle.com.

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