By Jim Christie and Peter Henderson
SAN FRANCISCO (Reuters) - California Governor Jerry Brown and Democratic legislative leaders have reached a deal that bypasses Republicans and relies on higher tax revenue forecasts and some spending cuts to close a $10 billion gap.
That sets the stage for the state, which has become a symbol of political failure, for the first time in years to start a budget cycle with a spending plan in place. That's largely thanks to an improving economy that has helped California's rich.
Tax revenue is coming in far ahead of expectations, Brown told a news conference, adding that he decided to craft a budget with Democratic allies, who have majorities in both houses of the California legislature, when he determined he could not overcome a "religious reluctance" among Republicans to embrace tax extensions.
The mortgage crisis, high unemployment and a lingering multi-billion-dollar budget gaps had made the Golden State a butt of jokes and derision.
Now California's economy is perking up and rich taxpayers who are the key to state's revenue are doing relatively well and helping replenish the state's coffers.
The new plan projects a $4 billion increase in revenue and spending cuts that will be triggered if the funds fail to materialize, Brown said.
He said he would seriously consider a ballot initiative in 2012 to extend tax increases for several years and to tackle the state government's "wall of debt."
Support from the minority Republicans would have been necessary to put a tax measure in front of voters but Democrats can pass a budget without tax hikes using a simple majority.
State Senate President Darrell Steinberg and Assembly Speaker John Perez, both Democrats, will deliver the necessary votes to advance the plan through the legislature, Steinberg said in the news conference, monitored by webcast.
Legislative aides said lawmakers would begin voting on the plan on Tuesday.
Brown had vetoed a budget plan approved by Democrats earlier this month, saying it included "legally questionable maneuvers, costly borrowing and unrealistic savings."
Elements of the plan for the fiscal year, which starts on Friday, include parts of Brown's budget proposal and parts of the Democrats' budget that he vetoed.
BANKING ON ECONOMIC REBOUND
Their joint budget plan features more spending cuts to state universities and courts, revenue from sales taxes that online retailers will be required to collect, assorted fees and deferring payments to schools and community colleges.
The plan also provides for taking $1.7 billion from redevelopment agencies, which they say they will contest in court, along with a reserve of just under $500 million, compared with the $1.2 billion reserve Brown had urged.
Brown initially tackled the state's shortfall, which topped $25 billion at the start of this year, with plans to slash spending. He pushed through $12 billion in cuts and other measures early this year and had hoped to extend tax hikes to avoid more dramatic cuts.
Republicans in the state Senate had offered to back tax extensions as part of a budget compromise if Brown supported their demands for a spending cap and changes to public pensions and state environmental rules. A deal, however, proved elusive and Assembly Republicans ruled out taxes.
"They're not able to enact the governor's massive tax increase because of Republican resolve," said a spokeswoman for Assembly Republican Leader Connie Conway.
Senate Republican Leader Bob Dutton criticized the deal between Brown and Democrat leaders, saying it is far from certain the state's revenue will strengthen as they expect.
"This latest budget is based on the hope that $4 billion in new revenues will miraculously materialize but does absolutely nothing to change government as usual," he said.
If revenue falls short, under the budget agreement, more spending cuts would be imposed, striking at programs Democrats are hoping to spare.
"This is the kind of accounting that can bite you in the backside," said Larry Gerston, a political scientist at San Jose State University.
(Reporting by Jim Christie and Peter Henderson; Editing by Bill Trott)