ARNOLD, DEMS NEAR DEAL BUT WILL GOP AGREE TO SPENDING CAP COMPROMISE?

Byline: David M. Drucker and Harrison Sheppard Sacramento Bureau

SACRAMENTO - With time running out to put Gov. Arnold Schwarzenegger's $15 billion fiscal recovery package on the March 2 ballot and protect the state treasury from possible insolvency, key Democrats said Wednesday that a compromise with the administration was near.

But whether Republicans would go along with a watered-down spending cap that was the centerpiece of Schwarzenegger's $15 billion recovery plan remained uncertain.

The process already is in a second overtime and possibly subject to a legal challenge with the Assembly not scheduled to vote until today at the earliest and the Senate possibly waiting until Sunday - more than a week after the original deadline set by Secretary of State Kevin Shelley.

Sources said the potential breakthrough is based on Schwarzenegger agreeing to drop his demand for a hard spending cap tying expenditure growth to a mathematical formula based on inflation and population growth. The compromise, the details of which are still being worked out and could change, would limit expenditures but allow lawmakers to spend money based on projected revenues, as opposed to actual revenues, similar to what they do now.

``We have a very interesting set of things that are occurring,'' Assembly Speaker Herb Wesson, D-Los Angeles, said. ``At this point in time I have put the members on alert and I have them scheduled to return (today).''

To protect against future deficits like the $38 billion shortfall last year and the $29 billion shortfall expected in fiscal year 2004-05, borrowing to balance the budget would be prohibited and a mandatory reserve fund would be implemented. To guard against the possibility that Democrats might purposely overstate projected revenues to allow for additional spending, some Republican lawmakers would like a three-person commission charged with revising revenue estimates quarterly.

But the moderate who proposed the commission said he was willing to live without it.

``If you had a single party controlling the government then there could potentially be some gaming of the numbers,'' said Assemblyman Keith Richman, R-Granada Hills. ``But it is a very good compromise measure.''

The compromise being bandied about looks a lot like the spending-limitation proposal hatched by Richman and Democratic Assemblyman Joe Canciamilla of Martinez. According to a legislative source, the framework being circulated by the Governor's Office includes:

--A balanced-budget requirement that precludes borrowing to make up any shortfall.

--A mandatory reserve fund that must be paid into every year, beginning in 2006-07. That year, 1 percent of general fund revenues would be routed into the reserve, increasing to 2 percent in 2007-08 and 3 percent annually thereafter. These funds would be used for paying down the $15 billion bond and in the event of another economic downturn that results in a decrease of tax revenues.

--Midyear spending cut authority for the governor. Currently, the governor can propose budget cuts and call a special legislative session, but nothing happens if the Legislature does not act. This proposal would allow the governor's midyear cut proposals to become law unless rejected by a majority vote - not the two-thirds vote the governor sought.

--Paying off the $15 billion bond in 15 years as opposed to the 30 years originally suggested by Schwarzenegger.

The administration declined to comment on specifics, but said late Wednesday that it remained highly optimistic a deal could be reached. And Schwarzenegger was scheduled to remain in the Capitol late into the evening to continue talks with Democratic and Republican leaders.

``Our position will be to continue to talk and negotiate until someone assures us there's no point to do it,'' Schwarzenegger's communications director, Rob Stutzman, said.

Democrats seemed to share that optimism, but Republican leaders Sen. Jim Brulte of Rancho Cucamonga and Assemblyman Dave Cox of Sacramento declined to comment despite repeated requests.

The deadline for placing the governor's fiscal recovery package on the March 2 presidential primary ballot was Friday, but Democrats balked at Schwarzenegger's call for a hard spending cap and gridlock ensued.

On Monday, Shelley granted the Legislature a reprieve until noon Wednesday but when that deadline passed, he said more time was available if lawmakers changed the statute that governs how long a measure must be accessible for public review before the ballot is printed.

Legal experts said lawsuits were possible over the issue of shortening the public-review period, but that they weren't likely to succeed.

``I don't think there's necessarily a legal risk (to shortening the public-review period) although in this newly judicialized political world I'm never surprised when somebody brings a lawsuit,'' Elizabeth Garrett, a University of Southern California law professor and expert in the ballot process, said.

David M. Drucker, [phone]

david.drucker(at)dailybulletin.com