ARNOLD CUTS BUDGET DEAL BOTH SIDES MAKE COMPROMISES TO BRIDGE FINAL $1 BILLION SPENDING GAP.

Byline: Harrison Sheppard  Sacramento Bureau

SACRAMENTO - Gov. Arnold Schwarzenegger and Democratic legislative leaders reached agreement Tuesday on a state budget for 2005-06, leading to the possibility of the earliest state budget in five years despite the harsh rhetoric in recent weeks.

A vote in the Legislature is scheduled for Thursday on the roughly $116 billion spending plan, which both sides hailed as a compromise that resulted from lengthy meetings over the holiday weekend.

``This is a terrific budget for the future of California,'' Schwarzenegger said. ``It's a budget that we can all be proud of. It's a budget that is balanced, it pays down some of our debt. It doesn't borrow any new money and it does not raise taxes.''

Assembly Speaker Fabian Nunez, D-Los Angeles, echoed the governor: ``Both Democrats and Republicans are protected. On the one hand this budget is fiscally sound. On the other hand this budget is compassionate.''

State officials have now missed the June 30 deadline for the budget 16 times in the past 20 years - including the first year of Schwarzenegger's administration, when it was signed 31 days late. But if the deal is passed and signed by the governor this week, it will be the earliest budget since 2000.

The budget deal involved a series of compromises by both sides to bridge the final $1 billion gap.

Earlier in the process, Democrats gave up plans for a tax increase to fund education within the budget itself, instead splitting the proposal into a separate bill that has already failed one vote and is expected to continue facing strong Republican opposition.

Schwarzenegger gave up on his plan to shift $469 million in teacher pension costs to local school districts, instead agreeing to a Democratic proposal to save half the costs by delaying some payments due to schools under Proposition 98.

He also agreed to reduce his plan to save $408 million by negotiating lower state employee salaries. Finance Director Tom Campbell said the administration still plans to try to negotiate a large reduction, but is only budgeting for $40 million in savings.

Schwarzenegger got Democrats to concede to reducing the future deficit by paying off funds due to local governments earlier than expected.

Schwarzenegger had originally proposed paying off about half of the $1.2 billion owed to cities and counties through vehicle license fee payments - money that the state had to borrow when it cut the car tax - in 2005-06, and the rest the following year. Democrats at first wanted to make no payments in 2005-06 and pay the full amount in 2006-07. They have now agreed to pay back the full $1.2 billion this fiscal year.

One of the other concessions by Schwarzenegger that Democrats had sought was getting him to back off from plans to reduce state payments for In-Home Supportive Services worker salaries by $200 million.

The deal was reached after about 10 hours of meetings over the holiday weekend between Schwarzenegger and the four legislative leaders, and an additional three hours Tuesday.

The most recent budget vote by the Assembly was June 15, when the Democratic proposal received a 47-32 vote, failing to win Republican support for the necessary two-thirds margin. The Senate also rejected the measure that day and in a second vote June 30, both times failing by a party line 25-13 split.

Since 1978, the Legislature has made its June 15 deadline only four times and the governor has met the constitutional signing deadline of June 30 only nine times.

Republican legislative leaders said they were glad to see full funding for transportation under Proposition 42 and a reduction in the future deficit.

``Would we have wanted to go further? Yes, we (would),'' said Assembly Republican leader Kevin McCarthy, R-Bakersfield. ``Will we come back tomorrow and fight for the rest? Yes, we will. But I think we've come a long way.''

Without a budget July 1, the state begins withholding payments to vendors and community colleges, and salaries for elected officials and their staffers and appointees.

Most state employees who do not receive their paychecks when the budget is late typically sign up for temporary loan programs that Sacramento-area banks have offered for years because of recurring late budgets.

State Controller Steve Westly said if the budget is not passed and signed by the end of July, the state would have to withhold up to $770 million in payments, and up to $7 billion if it lasted through September as it has twice in the past 20 years.

Medi-Cal payments to health care providers would still be made through the end of July because of a $1 billion cushion required by law, but would be in doubt if the budget is not signed by August.

``We are hopeful the Legislature will pass a budget within days,'' said Westly spokesman Russ Lopez. ``However, if they don't I think everyone is on notice that every day we don't pass a budget, the problem gets worse.''

Harrison Sheppard, [phone]

harrison.sheppard(at)dailynews.com

BUDGET HIGHLIGHTS

Gov. Arnold Schwarzenegger and legislative leaders reached a deal on a roughly $116 billion 2005-06 state budget Tuesday. Among key compromises:

--TEACHER PENSIONS: Schwarzenegger originally wanted school districts to pick up $469 million in pension costs. The deal announced Tuesday calls for the state to continue paying all of the costs - but half of that will come from delaying some Proposition 98 payments.

--LOCAL GOVERNMENT FUNDS: Schwarzenegger had proposed paying at least half of $1.2 billion owed to local cities and counties in vehicle license fee funds in 2005-06 while Democrats wanted to pay the full amount in 2006-07. The deal calls for the state to pay the full amount in 2005-06.

--EMPLOYEE COMPENSATION: Schwarzenegger had proposed saving $408 million by renegotiating employee salaries. The new deal calls for only $40 million in savings through employee renegotiations.

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BUDGET HIGHLIGHTS (see text)