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Assembly Democrats have quietly halved the size of a controversial borrowing plan in their budget, recognizing legal pitfalls that could undermine their idea, according to an Assembly source.

They initially proposed a maneuver in which the state would sell nearly $9 billion in bonds against its Beverage Container Recycling Fund, using proceeds from deposits that consumers pay on cans and bottles to pay off bond debt in future years. To make up for the recycling fund money, the state would then enact a new tax on oil production. Essentially, the state would borrow against oil tax revenues.

Assembly Democrats are now asking to sell only about $4 billion in such bonds. They would use the money to pay for $1.1 billion in job creation incentives, $900 million for local governments, $900 million to reduce UC and CSU fees, and the remainder for public school costs outside of the state's Proposition 98 guarantee. They believe using the funds that way, rather than for additional billions of dollars of deficit relief, would have stronger legal footing.

Attorney General Jerry Brown's office last week determined that a court could reasonably conclude that the Assembly Democratic plan violated Proposition 58, a constitutional prohibition on borrowing to balance the budget. Assembly Democrats have insisted that Brown's interpretation was too conservative, but they acknowledge that their plan would face a drawn out legal battle.

Their scaled-down version may face fewer constitutional problems, but it doesn't solve for nearly as much of the state's budget deficit, estimated to be $19.1 billion by Gov. Arnold Schwarzenegger. To make up the difference, Assembly Democrats are counting on more revenues from a controversial sale of state office buildings and some undetermined form of borrowing that would not run afoul of Proposition 58.

Assembly Speaker John A. Pérez, D-Los Angeles, and Senate President Pro Tem Darrell Steinberg, D-Sacramento, are meeting this week to discuss ways to resolve their budget differences. Both Democratic caucuses have rejected broad cuts to welfare, child care and health services in Schwarzenegger's budget, though that means they need more revenues to pay for those programs.

Senate Democrats have a separate plan that does not involve selling bonds, but relies upon extending 2009 tax hikes on vehicles, sales and income, as well increasing the alcohol tax on an inflation-adjusted basis and suspending corporate tax breaks. That proposal falls about $2 billion short of balancing the budget.


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