California lawmakers approved on Thursday a state budget package to close a $42 billion deficit, ending a lengthy standoff with a slate of bills that aim to raise taxes, slash spending and increase borrowing with Gov. Arnold Schwarzenegger's signature.

Both houses of the Democrat-led legislature passed the package and Schwarzenegger, a Republican, is eager to sign it. Certainly as soon as we can, said spokesman Aaron McLear.

The early morning votes for the 18-month spending plan ended an impasse in the legislature of more than 100 days over balancing California's books during which the state's economy weakened significantly and substantially cut its revenues.

The package provides for $15 billion in spending cuts, $12.8 billion in tax increases and $11.4 billion in borrowing. It also creates a $1 billion reserve for fiscal 2009 to 2010.

Assembly Speaker Karen Bass said those basic points, bitterly contested between Democrats opposed to spending cuts and anti-tax Republicans, would prevent the government of the most populous state from falling off a financial cliff.

We may have taken a rocky ride down the side of that cliff, but the state is intact and ready to get in gear for recovery, Bass said.


The financial woes besieging California had become so severe state officials had braced for the state's cash account to be depleted this month if a budget was not passed.

Standard & Poor's Ratings Services this month cut California's general obligation bond rating to the lowest of any U.S. state, a rebuke and warning to the biggest issuer of U.S. public debt that its borrowing costs could jump if it did not close its massive shortfall.

Officials in the state capital of Sacramento in recent weeks scrambled to bolster the state's finances amid an unprecedented revenue crisis, the result of Wall Street's meltdown, rising unemployment, a sharp pullback in consumer spending and the long housing downturn.

They clamped down on spending by putting public works projects on hold, withholding payments to counties for social services and postponing tax refunds, and this week Schwarzenegger told state departments to send layoff warning notices to 20,000 state employees.

Additionally, lawmakers were made fully aware federal stimulus money was at risk if the state's finances remained in doubt, adding pressure to pass the budget package.

It just got to the point where they just had no choice, said Larry Gerston, a San Jose State University political scientist. It just became so unbearable that the most principled or stubborn people, you can take your pick, had to think about it.


Schwarzenegger and top lawmakers from both parties agreed on the budget package late last week and the legislature held marathon sessions over the long Presidents Day holiday weekend to debate it. The package had enough votes in the Assembly to pass but was one Republican vote short in the state Senate.

Whether Senate President Darrell Steinberg would win that single vote was thrown into doubt on Wednesday after the chamber's Republican caucus turned on Sen. Dave Cogdill, who as their leader had negotiated the budget package, and replaced him with anti-tax hard-liner Sen. Dennis Hollingsworth.

But Sen. Abel Maldonado provided the pivotal Republican vote in exchange for support from Democrats for altering the budget package's tax plans, including dropping a proposed hike of 12 cents a gallon to the state's gasoline tax.

Maldonado also secured support from Democrats for bills to suspend pay increases for lawmakers when the state's finances falter and for a ballot measure proposing open primaries.

Concerns and hard feelings mixed with relief that a spending plan would soon be signed into law.

Jack Pitney, a professor of government at Claremont McKenna College, said the package may prove to be only a short-term fix for the state's finances: It was the triumph of exhaustion over deliberation ... The only thing worse than the budget is continued stalemate.

Former eBay CEO Meg Whitman, who is running for the Republican nomination to succeed Schwarzenegger, predicted the package would worsen future state budget deficits. The budget that was passed by the state legislature is not the solution, she said in a statement.

Assemblywoman Julie Brownley, a Democrat, said the package was a monstrosity and denounced the legislature's Republican minority for dictating terms repugnant to a majority elected by the populace.

Orange County Supervisor John Moorlach said tax increases would harm the state's economy: The last time we pulled something like this we saw the U-Haul index change, with a lot of people moving out of the state.

Bill Whalen, a Hoover Institution fellow and former aide to former California Gov. Pete Wilson, noted the package's plan for selling debt backed by state lottery revenues relies on voter approval, requiring Democrats and Republicans to campaign together. The question will be how much bipartisanship will be on display for the voters, Whalen said.

(Editing by James Dalgleish)