ASSEMBLY CLOSER TO BUDGET DEAL.

Byline: David M. Drucker Sacramento Bureau

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

If so, passage would come a full week after the supposed legal deadline and leave open the possibility of legal challenges as well as possible opposition from state Treasurer Phil Angelides and others who disapproved of the governor's recovery strategy.

The compromise package was brokered over days of tough negotiations mainly by the Republican governor and Democratic Assembly Speaker Herb J. Wesson, D-Los Angeles. The deficit-financing bond to be paid off in 15 years and the constitutional spending limit are a far cry from the spending cap originally sought by Schwarzenegger, but most Democratic and Republican legislators have accepted it as the best deal that can be worked out. Both sides undoubtedly will claim victory.

``We're optimistic. Everything right now seems to be cruising in the right direction,'' Schwarzenegger's press secretary, Margita Thompson, said. ``It's positive that everyone is focused on getting this before the voters in March.''

The original drop-dead date 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 gave up, then 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 they support.

``I really don't call it a spending cap because it's tied to revenue sources and those are estimated revenue sources. The good thing is the restriction on borrowing: it truly will be a balanced budget,'' Assemblyman Bob Pacheco, R-City of Industry, said.

Added Democratic Assemblywoman Jackie Goldberg of Los Angeles: ``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.''

The language of the bill was still being refined Thursday evening. But according to the parameters of the compromise being circulated by the Governor's Office, California will sell a $15 billion bond paid back with general-fund money over 15 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 some 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.

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.''

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.

The constitutional spending limit would still allow spending to be pegged to estimated revenues, with no restraint mechanism if revenue falls below expectations as it has in recent years. But for Democrats, avoiding such a component was key as it will permit them to expand ongoing programs in the future based on a spike in revenue.

Republicans, though skeptical, were meeting with Schwarzenegger regarding the compromise late Thursday and indicated they were prepared to embrace the bill's positive aspects. A large majority of GOP legislators was likely to vote for the bill.

``Is this as good as it's going to get? The answer is no, not in our mind. But sometimes there's steps and progresses made on an incremental basis,'' Assembly Minority Leader Dave Cox, R-Sacramento, said.

David M. Drucker, [phone]

david.drucker(at)dailybulletin.com