The first major break in months in California's budget standoff came Thursday as Senate leaders announced a deal that gives in to Republican demands to avoid tax increases, erases most of the state's gargantuan deficit and puts off billions of dollars in spending cuts for a full year.

The afternoon deal capped an extraordinary day at the state Capitol, which began with the pronouncement of an Oct. 7 recall election against Gov. Gray Davis and reached a crescendo when a major rating agency downgraded California's creditworthiness to near junk-bond status.

Two hours later, Senate President Pro Tem John Burton and Senate GOP leader Jim Brulte announced they had an agreement, one reached nearly a month after the start of the fiscal year and 24 days into an impasse that officials say is costing the state millions of dollars a day.

"We believe it is the best we can do at this time, and it is in the best interest of the people of the state to move on with a budget," Burton said.
The centerpiece of the plan to wipe out much of a $38.2 billion budget deficit is the unprecedented sale of $10.7 billion in deficit bonds, to be paid back over five years and anchored by a tax swap that will not directly affect taxpayers.

The plan also, according to the pair of senators, includes $3 billion in new cuts, including reductions to health care programs, and a 5 percent rate hike for Medi-Cal providers. More than $2 billion of those cuts is not slated to be made until next year, when payments come due for the deficit bonds and the lawmakers hope the economy will perk up.

But the senators declined to make public many of the specific cuts, instead providing what they called "a framework."

The Senate is scheduled to vote Sunday night on the plan, and Burton and Brulte said they are confident they will win the needed two-thirds majority -- or 27 votes. A spending plan must then be approved by the Assembly before it is sent to Davis.

"The Republicans were absolutely adamant that they would not vote for any increased taxes. We were adamant that we were not going to balance this budget on the backs of the poor, the aged and the blind and disabled," Burton said. "They've apparently achieved their goals; we clearly achieved ours."

Word of the deal came hours after Standard & Poor's dropped the state's credit rating three notches to the lowest level in the nation. And it ended weeks of anticipation that Burton and Brulte would be the men who crafted a deal to end the impasse.

It signifies a major political victory for Republicans -- who are a minority in both legislative chambers and hold no statewide offices. Absent is a list of tax increases proposed by Davis and other Democrats ranging from a sweeping sales tax hike to higher taxes for cigarettes and for the state's highest earners.

"The Republicans got their budget, and we'll all have to live with it," said Sen. Jackie Speier, D-Hillsborough, who said she will support the plan. "We just pushed everything forward."

The deal relies on a complicated tax swap to finance $10.7 billion in long-term borrowing. The swap stems from the need to carve out a separate source of revenue to pay off bonds that would be sold to cover about a third of the deficit. Davis and fellow Democrats in the Legislature had proposed a temporary half-cent sales tax increase to pay off the bonds.

"No matter how much I would like to, I do not know how to eliminate that deficit that took three years to create in one year," Brulte said.

Though endorsing the idea of deficit bonds, Republicans refused to swallow the tax increase and instead argued for paying off the bonds with existing revenue.

Under what some lawmakers call the "triple flip" scenario, the state would repeal a half-cent of the sales tax dedicated to local governments and simultaneously raise the state portion of the sales tax by the same amount.

This new revenue source could then be used to pay off the bonds. Local governments would be reimbursed for their lost revenue with property tax revenue that the state now spends on schools, and the state would have to cut up to $2 billion from its other operations to keep school spending at the level required by law.

Though cities and counties feared the swap deal would hurt them, at least one official said he believes the deal will be structured in an acceptable way.

"As they described it, it meets our conditions of support," said Steven Szalay, executive director of the California State Association of Counties.

School advocates more overtly cheered the plan.

"After months of significant concern and worry about where the education budget might end up, this plan gives us the stability and certainty we've been looking for," said Kevin Gordon, executive director of the California Association of School Business Officials.

Though Democrats appear to have all but given up their fight for tax hikes, Burton won some key victories in his fight to spare cuts for the state's most needy.

Among them: The agreement as described by Brulte and others would revive cost-of-living increases for state aid programs for the blind, elderly and disabled and abandons planned cuts to a slew of optional benefits for Medi-Cal recipients, including medical supplies and dental services.

The deal also kills a manufacturers tax credit Burton disliked but some had hoped to extend past its expiration date this year.

The deal would not require suspending the state's statutory minimum spending requirement for schools and would translate to a $1.2 billion cut from local government. It assumes that the state will continue to draw revenues from a recent vehicle license fee increase -- despite legal challenges of the hike that are supported by Brulte.

And it would leave the state with about $8 billion in red ink at fiscal year's end, Brulte said, the same deficit that Davis' May budget predicted for the coming year.

"At the end of the day, if we come back here next May or June with a $7 (billion) to $8 billion problem instead of a $38 billion problem, I consider that a huge step forward," Brulte said.

Davis issued a statement Thursday praising the Senate leaders and a budget plan that protects public education.

"There's a great deal in this budget for everyone to dislike. Nonetheless, Californians are counting on the Legislature to do its job and pass a budget," Davis said. "The casualties of inaction are mounting every day. I urge both houses to pass a budget quickly."

Assembly Speaker Herb Wesson on Thursday said, "We have considered and we will consider everything."

Assembly Republican leader Dave Cox issued a statement saying: "It appears that the Legislature has taken a critical first step toward a final resolution.

"At this point, the Assembly Republican Caucus has not had an opportunity to review the Senate proposal. However, we look forward to reviewing the plan upon its passage from the Senate."

Budget compromise highlights
* Assumes tripling of car tax, but has no other tax increases.
* Includes $10.7 billion in bonds to pay part of the deficit.

* Dedicates one-half cent of existing sales tax to repay the debt over five years, beginning in 2004-05.

* Restores cost-of-living increases for the aged, blind and disabled in January.

* Assumes state employee layoffs or pay cuts as proposed by Gov. Gray Davis.

* Largely protects kindergarten through 12th-grade schools from additional cuts.

* Eliminates tax credit for manufacturers.

Source: state Senate