SACRAMENTO — Gov. Arnold Schwarzenegger signed a $130-billion budget Friday that raises sales and income taxes across the board for the first time in 17 years and slashes spending by one of the sharpest rates in modern California history.
The governor's signature -- and additional line-item vetoes he made to funding for prisons and the offices of other statewide elected officials -- reduces spending from the state's main pool of tax dollars by 11% over the next 16 months.
That brings California's budget back to the level it was in the 2005-06 fiscal year, at the height of the housing bubble. However, the state's dollars buy less than before because salaries are higher, medical treatments are more expensive and the population is larger.
Although the governor's signature ends the immediate crisis, California remains in a precarious financial situation. If, by April, the state does not secure about $2 billion more in federal aid than it now expects to receive, deeper cuts will automatically kick in because of provisions in the budget, which the Legislature approved at dawn Thursday after twice working through the night. Those cuts would include 4% reductions in welfare grants, 2.3% cuts to the blind and disabled, wage caps for in-home aides to the ill and reductions for colleges and universities.
If the economy continues to deteriorate, lawmakers and fiscal experts say, the state will face another budget hole after mid-May that will require more painful decisions.
"We don't know when revenue is going to stabilize," said Assembly Speaker Karen Bass (D-Los Angeles).
And the budget plan would develop an additional $6-billion deficit if voters rejected several provisions lawmakers are placing on a special election ballot May 19.
"After the state counts the tax returns that come in April, after the election in May, I think we are likely to be back to budget negotiations once again," said Jean Ross, executive director of the California Budget Project, a nonprofit think tank in Sacramento that is concerned with poor and middle-class people.
At a brief ceremony where he signed the budget, Schwarzenegger did not dwell on these concerns. "During a down economy and facing an historic budget deficit, we had to make some very difficult decisions, but I am very proud that California is back on the best path forward," he said.
State Treasurer Bill Lockyer said he believed the budget package would reassure investors that it was safe to lend California money again, thus letting the state resume thousands of public works projects that have been idle since December because of the cash crunch. But he cautioned that "our return to full speed will not happen overnight" and that the state will have to pay contractors' old bills dating back to June before it can resume spending on new projects.
"We should have a much clearer sense of the state's cash situation in a few weeks," Lockyer said. "With that information, my office will be better able to decide how fast, and to what extent, we can restore the flow of bond money so vital to our economy."
The final package erased a projected $41.6-billion deficit by setting the budget at $130 billion for the next fiscal year and making $6.7 billion in cuts that take effect immediately. The gap was closed in these ways: 36% spending cuts, 30% new taxes and other revenue, 19% federal money, 13% in new borrowing and 2% vetoes, according to the administration.
California's two massive university systems, UC and Cal State, will take a considerable hit.
At the 23-campus Cal State system, Chancellor Charles B. Reed said plans to reduce enrollment by about 10,000 students will go ahead.
UC President Mark G. Yudof said that "lower spending for higher education ultimately erodes student opportunity, innovation, healthcare and medical research, and economic growth for California."
In his largest line-item veto, the governor struck $400 million from the Department of Corrections and Rehabilitation. That will probably require the state to reduce its extensive oversight of parolees and possibly the number of inmates in its overcrowded prisons.
The administration in the past has explored shortening parole terms and ending active monitoring of lower-level offenders while they are still on parole. Those efforts have met with opposition from local officials, who lose the right to search ex-convicts without a warrant once they are discharged from parole.
Another idea under consideration is to shorten inmates' prison stays by giving them more credit for good behavior, working behind bars and completing rehabilitation programs.
Schwarzenegger cut the budgets of most other statewide elected officials, including the attorney general and insurance commissioner, by 10%. But he hacked out 62% of the budget of the office of Lt. Gov. John Garamendi, a Democrat who is running to replace Schwarzenegger and has loudly criticized the final budget package.
"We were looking at what is necessary in state government," said Schwarzenegger's director of finance, Mike Genest. "The lieutenant governor's duties are just of lower priority."
Under the state Constitution, the lieutenant governor's responsibility is to step in as the state's chief executive when the governor is out of state, has been impeached, is disabled or leaves the job.
He can also break ties in the California Senate; sits on the governing boards of the state's public university and college systems; and heads panels on economic development and state lands.
Garamendi said in an interview that his new office budget of $1 million would force him to lay off about half the 21 people who work for him. "The issue is not me; the issue is this budget," he said. "There are going to be thousands of Californians and thousands of students who are going to suffer because of their budget."
Times staff reporters Larry Gordon and Michael Rothfeld contributed to this report.