Last updated at 9:19 p.m. EDT
Lawmakers on Friday approved a complex package of spending cuts, accounting maneuvers and raids on local government coffers to fill California's gigantic budget deficit, providing hope that the state might begin a slow climb out of a deep financial hole.
The action came after a grueling month for the Legislature as the state dealt with a historic financial crisis that has grown more dire by the day, driven by a dramatic drop in income tax revenue amid the recession.
The cash crisis has become so acute that California has been forced to send IOUs instead of payments to thousands of state contractors and was facing the prospect of being unable to fund pension contributions or pay employees by September.
The cuts imposed by the Legislature are extraordinary. The deal will mean teachers are laid off, college students will pay more, parks will be closed, and office buildings will be sold off. Lawmakers agreed the scope of the cuts was distasteful, but most said they had little choice.
"The only way to do it is to spread the sacrifice. That is why this budget is an acceptable budget to me, it saves our state from financial ruin and from drowning into the fiscal abyss," Gov. Arnold Schwarzenegger said, adding he was pleased that they avoided passing tax increases. "We have endured the darkest of storms and the harshest of winds. ... We have emerged battered and bruised, but we are intact and we are still standing."
The package of about 30 bills first passed the Senate after an all-night session Friday, then was approved by the Assembly in the afternoon. It was similar to the deal announced earlier this week by Schwarzenegger and legislative leaders.
The Assembly rejected two of the most controversial measures, a plan to take about $1 billion in transportation funding from local governments, and allowing oil drilling off the California coast for the first time in 40 years. That was to have brought in $100 million this fiscal year.
The loss of $1.1 billion from the budget package means Schwarzenegger will have to use his authority to make even deeper cuts to close the gap. The governor vowed to make more cuts sometime next week to make up the difference and restore a reserve fund he has long sought.
The passage of the bills brought a measure of relief to a bewildered lawmakers after a marathon session. "I don't even remember if it's afternoon, evening or night," said Assembly Speaker Karen Bass, D-Los Angeles.
She acknowledged that the fixes aren't permanent: "We do not exactly know where the economy is going right now."
Hallye Jordan, a spokeswoman for state Controller John Chiang, said the controller hopes to decide within the next two weeks when California can stop issuing IOUs to cover its bills.
The budget agreement will be felt in nearly every community of the nation's most populous state.
Cuts to public schools are expected to force teacher layoffs, more crowded classrooms and scaled-back offerings in art, music and sports.
College students will pay hundreds of dollars more per year in fees, course offerings will shrink and tens of thousands of prospective students will be turned away.
Welfare, health care programs for low-income families and in-home services for the disabled and elderly will be reduced. Nearly 40,000 will have their in-home support services terminated.
Even state workers, long protected by powerful public employee unions, have been affected. Schwarzenegger has ordered them to take three days off a month without pay, equating to a 14 percent pay cut.
An undetermined number of state parks will close after Labor Day, and the state will be authorized to sell 17 state office buildings to raise cash, renting the space back from the new landlord. The Orange County Fairgrounds also will go on the market.
The oil-drilling measure emerged as one of the most contentious, with Assembly lawmakers debating for more than an hour before Democrats prevailed in killing it. Assemblyman Pedro Nava, a Democrat from Santa Barbara who has long opposed the project, said the governor appeared to be willing to hijack California's future because of a budget crisis.
The spending cuts amount to roughly 60 percent of a budget deficit projected at $26 billion through June 2010. The size of the shortfall is unprecedented, representing nearly 30 percent of the state's $88 billion general fund.
Spending hasn't been at that level in California since 2005, underscoring the severity of the state's economic collapse. Its unemployment rate of 11.6 percent is the highest on record, and personal income tax revenue to the state fell 34 percent during the first half of the year.
When Schwarzenegger signs the budget agreement, state officials hope it will be enough to satisfy the bond markets and allow the state to begin taking out short-term loans.
But other issues loom.
The state's largest employee union, representing 95,000 workers, is asking its members whether they want to authorize a strike or walkout to protest the monthly furloughs.
Cities and counties, meanwhile, have said they might to stop the state from taking some $4 billion in local tax money. Local governments throughout the state, hit by declining property and sales taxes, already are laying off law enforcement officers, firefighters and other employees, while trimming park maintenance, library, trash and other services.
"This budget deal doesn't just kick the can down the road; it kicks it off the road into our front yard, and we've got a toxic mess spilling out that cities and counties are going to have to clean up," said San Jose Mayor Chuck Reid.
The Assembly's decision not to take $1 billion in transportation money from local governments succeeded in heading off a threatened lawsuit from cities and counties. The vote came after an intensive lobbying campaign by mayors and local officials from around the state, who bombarded lawmakers with letters and calls.
The rapid decline in tax revenue and Republicans' insistence on no tax increases left lawmakers with few options but to cut spending, borrow money from elsewhere and resort to various accounting tricks to balance its books.
One of those gimmicks was to defer state employee paychecks by one day, from June 30 to July 1, 2010, for a savings on paper of $1.2 billion. The state also will accelerate collection of 2010 personal income and corporate taxes to bring in revenue earlier than anticipated.
Schwarzenegger said the budget resolution is a sign to the financial community and the public that California is back in business - even if its image has been tarnished.
"I think the people that sometimes suggest that the American dream or the California dream is evaporating I think is absolutely wrong," he said. "I think the California dream is as strong as ever."