ASSEMBLY APPROVES BUDGET DEAL COMPROMISE STILL LEAVES POSSIBILITY OF LEGAL CHALLENGE.

Byline: David M. Drucker Sacramento Bureau

SACRAMENTO - The Assembly nearly unanimously approved a weakened version Thursday night of Gov. Arnold Schwarzenegger's $15 billion fiscal recovery plan for the March 2 ballot, with the Senate expected to follow suit this afternoon.

The action, stretching to almost 10 p.m. Thursday, came nearly a week after the supposed deadline, and left open the possibility of legal challenges, not to mention political opposition from Democratic state Treasurer Phil Angelides and others who disapproved of the governor's recovery strategy.

The compromise package was brokered over four days of tough negotiations, mainly by the Republican governor and Assembly Speaker Herb Wesson, D-Los Angeles. It left some Republicans grumbling - despite their aye votes - that the package did not go far enough to restrict state spending.

``This bill is not as good as it could be. Let no one think that it has a spending cap,'' Assembly Minority Leader Dave Cox, R-Sacramento. Still, he supported the plan because it improves upon current law.

The initial vote on the spending cap was 72-4, but the four dissenters, all Republicans, later changed their votes, making it 76-0 with four abstentions. The bond passed on a 65-13 vote with two abstentions.

The deficit-financing bond, to be paid off in nine years, and the constitutional spending limit are a far cry from the spending cap originally sought by Schwarzenegger, but most Democratic and Republican legislators accepted it because they believed it was the best deal possible.

``Last week the voters in this state told us ... they didn't have faith in us and they were tired of our partisan bickering,'' Wesson said during the floor debate. ``They wanted us to listen to their pleas and I think tonight is about hope ... Tonight is about sending a message that at least during this round, partisanship was defeated.''

The original deadline for approving Schwarzenegger's package for the March 2 presidential primary ballot was Dec. 5. But after negotiations failed last Friday because of the Democrats' refusal to support a hard spending cap, the governor refused to give up. He restarted talks and pushed for a compromise.

A spending limit resembling the bipartisan plan developed by Assemblymen Keith Richman, R-Granada Hills, and Joe Canciamilla, D-Martinez, was used as the basis for the revised proposal.

Democrats win in that the demand for a hard spending cap was dropped; Republicans win in that many of the legislation's elements, including its prohibition of borrowing to balance future budgets, are policies the GOP supports.

``By approving my California Recovery Plan tonight, the Assembly has taken the first step to put California back on sound financial footing,'' Schwarzenegger said through a spokesman.

``I commend them, Democrats and Republicans, for putting aside 'politics as usual' and working together with me to craft a plan that includes a balanced budget requirement to prevent us from facing such a disastrous fiscal crisis again.''

Even liberal Democrats like Assemblywoman Jackie Goldberg of Los Angeles agreed to the deal, saying: ``It's a compromise, and in a compromise you take the best you can get. But it does not mean there will never be reinvestment in California; that I couldn't vote for.''

Under the compromise, California will sell a $15 billion bond paid back over nine years to refinance the state's debt. It creates $5 billion more in spendable cash over the next five years than would have been available otherwise, with most of the bond consolidating previous borrowing that is in legal jeopardy. Schwarzenegger had been looking to pay the loan off in 30 years, but disagreement over the bond was never a real issue.

The key to the compromise was agreeing on components that will purportedly limit expenditures and prevent the kind of runaway deficit spending that led to shortfalls of $25 billion in 2002-03 and $38 billion in 2003-04, in addition to the $29 billion gap projected for fiscal year 2004-05.

The elements of the legislation that are said to do that include the establishment of a mandatory ``rainy day'' reserve fund, to be used for debt repayment and to make up for the lower tax revenues that usually accompany an economic downturn, and a new prohibition against borrowing for the purpose of balancing the budget.

``In the end, what we are doing is better than what we have,'' Assemblyman Ray Haynes, R-Temecula, one of the Legislature's most staunch conservatives, said.

Senate President Pro Tem John Burton, D-San Francisco, late Thursday afternoon indicated he is inclined to sign on to the compromise Schwarzenegger reached with the Assembly.

``We're just trying to see if what we saw comports with what we discussed and agreed to.'' And if it does it's more of a logistical issue, Burton said.

Republican legislators and Schwarzenegger were successful in strengthening the ability of California's governor to implement midyear spending cuts. Currently, the governor can propose such cuts, but absent legislative action the recommendations die. If voters approve this package in March, lawmakers would have to dispose of the governor's midyear cut proposals or an alternative to bring the treasury into balance before taking up any other business.

David M. Drucker, [phone]

david.drucker(at)dailybulletin.com