SACRAMENTO – The only thing moving at the State Capitol these days is the giant digital counter outside the governor’s office, tallying our way to ruin.

Every second, the counter adds $470 to the state’s growing deficit. The numbers spin frantically, manically, while the governor and a balkanized Legislature argue and pontificate but can’t agree on a solution.

The deficit will top $41 billion by July 2010, but the state will run out of cash sometime in February or March. California needs to fix its budget now or the wheels of government will begin grinding to a halt and the state will have to start handing out IOUs.

Already, the state has stopped $3.8 billion in financing for public works projects and there’s talk that tax refunds could be delayed this year.

The consequences of the cash crunch aren’t certain—this is uncharted territory–but elected officials and their staffs are expected to have their paychecks cut off as soon as February and college students could be cut off from grants from the Student Aid Commission. And that’s just where the problems start.

“This is the most challenging fiscal crisis California has ever faced,” finance director Mike Genest says. But elected leaders in Sacramento can’t agree on what to do and negotiations have faltered as all sides have drawn lines in the sand

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No compromise

Republicans, led by Assembly Minority Leader Mike Villines of Clovis and Senate Minority Leader Dave Cogdill of Modesto, have refused to support new taxes. The faltering economy has dramatically reduced state tax revenues, but Republicans have said spending cuts and redirected funds can cover the shortfall. The state needs to live within its means, they say.

Democrats, led by Assembly Speaker Karen Bass of Los Angeles and Senate Leader Darrell Steinberg of Sacramento, refuse to accept a cuts-only solution. The poor and the elderly would be hurt, they say. But state law says that two-thirds of the Legislature must approve a tax increase and the GOP control a little more than a third of it. A majority of the Legislature can only raise fees.

Several proposals mixing cuts and tax increases floundered about until Democrats dusted off a legal opinion that says a majority of the Legislature may raise and lower taxes so long as the net impact is zero. Using that questionable theory, the Democrats raised some taxes, lowered some others and enacted new fees. They sent the governor a budget solution without a single Republican vote.

But Gov. Arnold Schwarzenegger didn’t like the plan. He criticized the tax increases as hurting Californians and said the package didn’t do enough to stimulate the economy. Schwarzenegger said he wasn’t concerned about cutting his fellow Republicans out of the process, but he demanded that Democrats give him deeper cuts plus environmental and labor reforms to make new construction easier.

Democrats refused to give him exactly what he wanted. So he vetoed it.

Pressure on all sides

“We could not reach a deal because Democrats could not stand up to special interests” on the reforms he wanted, the governor said this week.

But Democrats countered that the Republican governor likewise was pressured to reject the plan because it cut Republican lawmakers out of the process.

And on the sidelines are the Republicans, who know that they’ll be blacklisted from their own party if they ever support a tax increase.

Whichever side you take, it’s been more than two months since state leaders realized the budget was bleeding red ink and they have next to nothing to show for it.

The governor used this void to push for the Legislature to consider his newest budget proposal, which his administration released on Dec. 31. But his new plan includes an unpopular proposal to cut the school year by a week and as well as a proposal to reduce tax credits for dependent children. It’s already drawn the same criticism leveled at previous plans.

Negotiations began anew Thursday, but the lawmakers had little to say. “It was a very good, cordial conversation,” Steinberg said.

Meanwhile, Republicans are pushing for immediate action on areas of consensus, such as spending cuts, but they’ve been pushing for that for some time and it’s gone nowhere. The governor wants a comprehensive plan, saying if you cut services and raise taxes you must also offer a good economic stimulus package.

As a stop gap, the governor has ordered the state Department of Personnel to adopt a plan to furlough state employees for two days a month without pay and to begin layoffs of state workers. State employees, however, are trying to block the order.

‘The worst’ ever

“I’ve never seen it this bad,” said State Sen. Lou Correa, D-Santa Ana, who was first elected to the Legislature in 1998, the earliest in the Orange County delegation. “Is this the worst? Yeah, this is the worst.”

There’s a sense on the Capitol that this budget calamity is historic not only for its numbers, but for the intractability of the factions. After years of piecemeal compromising on the budget, the only thing left is major reform – cutting the size government, changing the tax structure. Politically, major reform hurts.

“My perspective is that the Legislature, for far too many years, we’ve used band aids, short-term solutions to get us through every budget year that we’ve had, probably for the last six to eight years. And because of that, the crisis we always keep talking about has never really materialized as has been predicted,” Correa said.

“Today, we’ve reached the point where, again, we’re talking about a crisis and you hope that this point we do take this clear and present danger to put together some real reforms and real solutions.”

Like everyone else, he’s waiting to see if they do.

Contact the writer: 916-449-6046 or bjoseph@ocregister.com