By Shane Goldmacher
Los Angeles Times
June 10, 2009

Reporting from Sacramento — Senate Democrats unveiled a budget plan Tuesday that would stave off the deepest proposed cuts to California's health, welfare and student-aid programs by dipping heavily into the rainy-day fund that Gov. Arnold Schwarzenegger wants set aside in case the economy continues to sour.

The governor declared the Democrats' approach to dealing with the state's projected $24-billion deficit "hallucinatory."

With the state facing a looming cash crunch that Schwarzenegger said "literally will result in shutting down government," partisan bickering flared on Tuesday.

Schwarzenegger's budget, unveiled last month, would reduce the state's deficit by cutting heavily across state government. Unless new budget cuts or taxes are implemented, California won't be able to pay all of its bills by the end of July, according to the state controller.

Schwarzenegger's austere budget plan includes the elimination of Cal Grants, state-paid financial aid for lower-income students; Healthy Families, a program that provides health insurance to nearly 930,000 children and teens; and CalWorks, the state's welfare program, which serves about 530,000 families. The state's in-home nursing care for the elderly and disabled would also be severely curtailed.

Senate President Pro Tem Darrell Steinberg (D-Sacramento) said Democrats would not stand for the dismantling of the state's social safety net.

The Senate Democrats' plan he outlined would save those programs largely by tapping into a $4.5-billion reserve included in Schwarzenegger's budget. The Schwarzenegger administration has argued that the money should be tucked away in case the economy continues to suffer or program costs exceed those budgeted, such as for fighting wildfires. Democrats would lower the reserve to as little as $500 million, Steinberg said.

"The purpose of a rainy-day fund is to provide a reserve for a rainy day," Steinberg said. "It is thunder and lightning in California right now."

Under the Democrats' plan, every area of government would still face cuts, Steinberg said. Democrats are prepared to cut $13 billion in state spending, in part by largely accepting the framework of cuts that Schwarzenegger has proposed for the state's schools and prison system.

The remaining $6-billion to $7-billion shortfall would be chipped away by selling state assets, temporarily withholding more income tax from Californians and other accounting maneuvers.

Steinberg said that if Schwarzenegger or GOP lawmakers insist on a multibillion-dollar reserve, Democrats will push to roll back recently enacted corporate tax breaks that Republicans championed. Steinberg said Democrats would reject a Schwarzenegger administration proposal to raid $1.9 billion from cities and counties. The money would have to be repaid -- with interest -- within three years.

Still, local leaders remain concerned. Democrats would not rule out another raid of local government money in the governor's plan, which would cost cities and counties $750 million in gas tax revenues currently used for transportation projects. Los Angeles Mayor Antonio Villaraigosa led a small delegation of mayors to the Capitol on Tuesday to protest the plan, which he called "particularly galling." The money would not have to be repaid.

There is, however, some common ground in the Capitol amid all the sparring. All sides agreed that quick action is needed. Steinberg pledged passage of a plan by the end of the month.

Said Schwarzenegger: "It's not going to get any easier three weeks from now."

shane.goldmacher@latimes.com