SACRAMENTO — Gov. Arnold Schwarzenegger and legislative leaders have reached a deal on a new state budget that would allow California to begin paying its bills again, ending a showdown over the governor's vow to veto the spending plan lawmakers approved earlier this week.
"It appears we have an agreement," Schwarzenegger spokesman Aaron McLear said Thursday afternoon. He said the governor would meet with legislative leaders this morning to finalize it.
Lawmakers are scheduled to vote on the deal -- which does not include new taxes -- this afternoon.
The agreement would resolve a months-long fiscal crisis that has left officials unable to make billions of dollars in payments to schools, hospitals, medical clinics, nursing homes and other service providers. While state services would be cut under the new agreement, government spending would increase overall.
"Hopefully this will bring an end to the 80-plus days of pain," said Assembly Speaker Karen Bass (D-Los Angeles).
Lawmakers surrendered to Schwarzenegger's demand for tighter restrictions on their access to the state's rainy day fund. And they eliminated a proposal to raise $1.6 billion by increasing tax withholdings from Californians' paychecks.
They plan to raise that money instead by doubling penalties on corporations that are late in paying more than $1 million in taxes, according to details provided by legislative leaders.
A corporate tax amnesty program approved by the Legislature, intended to raise hundreds of millions of dollars in new payments, would be eliminated. Business groups had complained that it would have pressured companies to pay money they did not necessarily owe out of fear that they might lose a tax dispute with the state.
The amnesty revenue would be replaced partly by cuts the governor intends to make by line-item veto. And the rainy day fund -- which Schwarzenegger has insisted must be built up in the future -- would shrink.
Although the budget deal might eliminate some accounting gimmicks, it would still push much of the state's $15.2-billion shortfall into future years.
"I'm not proud of this budget -- it just kicks the can down the road," Senate President Pro Tem Don Perata (D-Oakland) said after a meeting in the governor's office Thursday.
Perata called the changes demanded by the governor "tweaks."
When Schwarzenegger issued his budget veto threat Tuesday, he also declared that if lawmakers were to override him, he would reject most of the legislation passed this year.
On Wednesday, it became uncertain whether legislators had enough votes to override a budget veto, and they scrambled to find a compromise. More than 800 bills hang in the balance.
Budget analysts said the governor had gained little by using a veto threat to block the budget plan that lawmakers had finally passed.
Jean Ross, executive director of the nonprofit California Budget Project, said the new provisions "are no less gimmicky than the withholding increases they replaced."
The state's rainy day fund for this year would drop from $1.2 billion to less than $830 million, and lawmakers will be able to avoid making deposits into the future reserve fund the governor has championed until after he leaves office.
The new restrictions on the fund would require a vote of the people, which legislative leaders suggested would probably occur in a special election next March to coincide with municipal elections.
Another part of the new spending plan -- borrowing against the state's lottery as a linchpin for balancing the 2009-2010 budget -- also requires voter approval.
Passage is far from assured. The state's powerful unions, which fought the tighter controls on the rainy day fund, could decide to mount a campaign to defeat it at the ballot.
Courtni Pugh, executive director of the Service Employees International Union in California, called the final spending deal "an inhumane budget" that showed "a lack of understanding of the growing human services needs, particularly when times are bad."
Becky Zoglman, a spokeswoman for the California Teachers Assn., said the budget proposal "sets our students and schools up for more funding shortfalls next year and sets the state up for the exact same budget problems next year."
Frustrated that the Legislature's Republican minority was able to stymie their plan to close the budget gap with new taxes, Democratic leaders have suggested that they would seek to add, separate from the budget measures, at least one of their own provisions to any special election ballot.
Their proposition would allow future budgets -- even those including tax hikes -- to pass by majority votes rather than the current two-thirds required.
The measure would allow Democrats to pass a spending plan without GOP votes under the current makeup of the Legislature.
"What we have been through over the last 80 days raises the fundamental issue of California being like 47 other states in the union and having a simple majority to pass a budget," said Bass.
"Perhaps when we go to the ballot next year . . . one of the items of budget reform is raising the question of the two-thirds majority," she said.
"I just fail to see what we have in common with Rhode Island and Arkansas," she said, referring to the only other states with a two-thirds majority requirement.
Times staff writers Patrick McGreevy and Nancy Vogel contributed to this report.