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After the Legislatures approval of the state budget, Gov. Arnold Schwarzenegger removes the numbers from the "deficit clock," outside his Capitol office in Sacramento, Calif., Thursday, Feb. 19, 2009. Schwarzenegger had the clock installed 106 days ago to count the number of days that the Legislature failed to act since he declared a special session to deal with the states fiscal problems. (AP Photo/Rich Pedroncelli)

SACRAMENTO — Gov. Arnold Schwarzenegger this afternoon thanked the Legislature for its "difficult but courageous" vote in finally approving a $41 billion budget package of steep tax increases and spending cuts designed to prevent the state from sliding into insolvency.

"This is the perfect medicine for our ailing economy and it will boost public confidence in California, reassure the financial community, and allow us resume selling our bonds and rebuild our state," Schwarzenegger told a Capitol news conference.

"Let's be clear, that our work is not over," he added, referring to a soon-to-be launched campaign to pass ballot measures that were tied to the budget vote.

He will sign the budget — to last through June 2010 — on Friday.

The breakthrough, after more than five full days of sometimes round-the-clock negotiations in the Legislature, came around 1 a.m. when Senate Democrats agreed to meet the key demands of GOP Sen. Abel Maldonado in exchange for his vote to support $14 billion in temporary tax increases. The deal pushed the budget plan over the two-thirds threshold it needed to pass.

At the last minute, the tax hike was reduced to $12.8 billion by eliminating a 12-cents-per-gallon excise on gasoline that Maldonado had opposed — funding that will be made up with California's share of federal economic stimulus money.


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About three hours after the compromise agreement hatched between legislative leaders and Schwarzenegger, the Senate and Assembly began voting on the budget package, which consisted of more than two dozen pieces of legislation, and the state's historic budget standoff came to an end. The impasse lasted more than three months and halted funding for public works projects across California, delayed tax refunds for millions of taxpayers, and caused the state's credit rating to be downgraded.

Tax refunds and other payments are now on track to be released in late February or early March, according to state Controller John Chiang.

"Today's budget agreement is a long overdue step that does not immediately fill our treasury that has run dry," Chiang said in a statement. "Because I have been forced by this situation to delay paying $3.3 billion this month to local governments, state contractors and even taxpayers themselves, the State still owes them the gratitude for their patience and for shouldering the real burden of gridlock."

The budget compromise deal between Maldonado, a moderate Republican whose district includes parts of Silicon Valley, and Senate President Pro Tem Darrell Steinberg, D-Sacramento, cleared the way for votes early this morning to put California on sound financial footing again.

Video: Maldonado on budget breakthrough

The agreement involved some raw political horse-trading.

In exchange for Maldonado's vote to raise taxes, Democrats agreed to place on the June 2010 ballot a pair of political reforms long sought by the senator: an overhaul of the state's electoral system to do away with partisan primaries and a refusal to raise lawmakers pay when the state is running a deficit.

One assemblyman called the deal "blackmail, extortion, and skulduggery." Another labeled it "political ransom." But with no end in sight to the budget nightmare, Steinberg and other Senate Democrats decided to swallow hard and meet Maldonado's demands.

"I'm a realist and I understood we needed a two-thirds vote," Sen. Elaine Alquist, D-San Jose, said of the tradeoff. "I did what I had to do."

Many legislators from both parties oppose a so-called "open primary" that would allow Democrats and Republicans to run in the same primary elections, with the top two vote getters advancing to the general election even if both are from the same party. (Alquist is a rare supporter of the system within her party.) Democrats also agreed to eliminate the proposed gas tax, part of a host of tax increases that led to a Republican revolt.

Schwarzenegger helped negotiate the agreement over lunch and cigars with Maldonado on Wednesday afternoon.

Amid those discussions, U.S. Sen. Barbara Boxer warned that the stalemate could jeopardize the state's share of the multibillion-dollar federal stimulus package.

Republicans shook up the Capitol early Wednesday with the surprise ouster of Senate Minority Leader Dave Cogdill of Fresno. Cogdill — who was once firmly against taxes but in the past week agreed to raise them — was replaced by Sen. Dennis Hollingsworth, whose district includes parts of Riverside and San Diego counties. The new Senate Republican leader immediately vowed to fight the tax increases that are a cornerstone of the proposed budget solution.

"Anyone that runs around and says that this can be done without raising taxes, I think, has not really looked at it carefully, or has a math problem and has to go back and take Math 101," a frustrated Schwarzenegger told reporters.

Two-thirds vote

But the leadership shift did little to change the course of the budget-vote standoff, which could be resolved only with a two-thirds majority vote, including three Republicans in each chamber. Even after his ouster, Cogdill remained committed to raising taxes, as did Sen. Roy Ashburn, R-Bakersfield, which left Schwarzenegger and legislative leaders to rely on Maldonado.

Schwarzenegger has expressed his support for a nonpartisan primary, and the governor later vowed to push for a ballot measure to create such a system. So Democrats calculated that placing the measure on the ballot, where interest groups would likely spend tens of millions to defeat it, was worth the price of passing the budget.

Years of overspending and months of declining revenue have pushed California to the brink, which the budget plan would fix by cutting — according to figures amended in the pre-dawn hours this morning — $14.9 billion in spending, $12.8 billion in taxes and $11.4 billion in borrowing. Those increases include a temporary 1-cent sales tax beginning in April, a personal income tax surcharge, and a vehicle license fee increase.

Before the compromise was reached, the budget called for $15.1 billion in cuts and $14.4 billion in tax increases.

The budget is intended to close a projected $40 billion deficit through mid-2010. It includes a tax break that benefits the high-tech and biotech industries. Parts of the plan depend on a series of ballot measures voters will be asked to approve in a special election in May. One proposition would seek to expand the state lottery and borrow $5 billion against the expected increased revenues.

Another would impose a cap on future state spending of roughly 4 to 6 percent annually. If voters approve the spending limit, most of the taxes would last for four years. If it fails, the taxes would expire after two years.

The overall budget deal involved major tradeoffs for both parties that they would never have agreed to absent the state's financial crisis. For Democrats, the spending cap was high on that list. Republicans who voted for billions in new taxes acknowledged that it could be a career-ender.

"I don't think anybody's happy with this," said Sen. Denise Moreno Ducheny, "other than we get to go home and sleep."

Contact Mike Zapler at mzapler@mercurynews.com or (916) 441-4603.

Sharon Noguchi, Peter Delevett and Karen de Sá contributed to this report.