Clearly sensing that the story was getting away from them... especially in light of all of the other big cuts in state services and a ballot measure that would extend tax increases on Californians... Bass and Assembly GOP Leader Mike Villines agreed to day to scrap the salary bumps, which apparently averaged about 5.5%.

"These increases risk becoming a distraction from the work being done in the Assembly and the important budget reforms on the May 19 ballot," she told reporters this afternoon. "And I have decided that I can't let that happen."

Villines echoed the same sentiments in a separate Q&A with reporters, and announced he's decided to cut his own legislative salary by 5%.

The speaker said that she spoke to many of the affected staffers before her news conference, and said they applauded her decision.

But still unclear is whether she was nixing the pay raises because of the perception... or because she now believed they were a mistake.

Bass, who pointed out that the Assembly has cut $38 million from its budget over the last couple years, never quite answered the question when I posed it to her.

"I didn't want it to be used by the people who are against the (budget ballot measures)," she said. That sounded like the problem was one of perception. She then said the issue was "a major concern." And that was that.

First, those revenues: the GOP plan would grab $6 billion in revenues generated from the state's 10-year-old tobacco tax (Proposition 10) and about $4 billion from a 2004 initiative that hiked the income tax on millionaires. The tobacco tax dollars are designated for childhood development programs; the millionaire's tax dollars are set aside for mental health programs (Proposition 63).

But don't call the plan the "B" word: borrowing.

"We don't consider that borrowing," said Senate GOP Leader Dave Cogdill. The proposal would, however, have to be ratified by voters because that's how the current designations were created. Cogdill says the $6 billion is sitting "idle" in the bank, and could be used to solve the state's short-term cash woes. Assembly GOP Leader Mike Villines calls the money "surplus," adding: "I don't think taxpayers realized they paid money into programs that are surplus. Let's put the question to them: would you rather that [money] go into the budget crisis?"

More on the revenues in a moment.

As for cuts, the proposal includes a trim to the Legislature's own budget (which, in the end, may be the one element that no lawmaker can defend not including, given the low esteem in which the body is held by the public); that proposal calls for a 5% across-the-board cut, including a cut in lawmaker salaries.

But the big cuts come in education (about $905 million beyond plans offered by Democrats and Governor Schwarzenegger) and an additional $86 million in social services programs. The education cuts are mostly in K-12, with about $75 million cut through GOP demands for repeal of the state law allowing in-state college tuition for undocumented immigrants.

The biggest education cut, by the way, is a polite jab to the governor: a $550 million cut in Proposition 49 funding, the afterschool initiative the guv championed in 2002.

(And jab #2 to the guv: a zeroing out of the budget for Schwarzenegger's famed "hydrogen highway," to the tune of $6 million).

The GOP plan also calls for loosening some of the state mandates on how education dollars are spent, as well as some of their pro-business demands that they say will stimulate the economy.

"If we do this today," Villines said to reporters, "it won't be as bad next year."

Back to those revenues... the advocates for Prop 10 and Prop 63 programs say the GOP legislators lack an understanding of how those programs work. In particular, they say the seemingly "surplus" dollars have been committed to valuable programs that are funded through two and three year grants, not annually.

"You might not think the [tobacco tax] dollars are not allocated, or earmarked, but they are," said Kris Perry, executive director of the California First 5 Commission.

"This proposal is like a Trojan Horse," said Rusty Selix, one of the authors of Prop 63, in a written statement. "While it looks like there is a lot of revenue available, inside that package are the costs of caring for thousands of people with severe mental illnesses who are currently succeeding in county programs." Selix says using this money elsewhere would just lead to mental health patients ending up in other state supported programs. "The savings are illusory," he said.

So now what? Hard to say. The proposal released today is not unexpected, and neither is its bottom line position on how to get out of the state's fiscal mess. That being said, it does seem to put the ball back in the court of Democrats to say if any of these ideas are ones they'll consider... in exchange for something else. It also allows GOP legislators to now dismiss criticisms that they haven't come forward with a plan.

[update: Assembly Speaker Karen Bass says in a statement the GOP plan will be vetted tomorrow by her chamber's Budget Committee. "The Republicans have to show they are finally serious about accepting real revenues as well," she said in a statement. "We'll learn tomorrow just how serious they are."

And even less enthusiasm from the governor. The GOP plan "is not a negotiated compromise," says gubernatorial spokesman Aaron McLear, "it's simply a [political] drill."]

"It" is the California Performance Review, the somewhat quixotic adventure of 2004 that attempted to make good on Governor Schwarzenegger's promise to "blow up the boxes" of state government.

It's back. Sort of.

The CPR was a three month endeavor, carried out by a few hundred state employees and endorsed by the governor, to find places for saving money in state government. "This report is a top-to-bottom look at how to improve our government," said Schwarzenegger at an August 2004 event staged inside a state surplus warehouse.

But by that fall, the commission appointed by the governor to review the CPR suggested it needed more work. The bipartisan group, as a story in the Orange County Register reported, "said several aspects of the 2,500 page plan commissioned by the governor need to be done over or delayed because they don't address the state's true problems."

That's not to say the CPR produced zero change; a few of its suggestions, like the creation of a state public health officer, were carried out.

But many more were deemed either not ready for prime time or declared DOA by powerful interest groups. Schwarzenegger himself dropped a high-profile push to abolish 88 state boards and commissions.

Now, during what appears to be one of the worst budget crises in state history, the CPR is back -- with the governor's fellow Republicans using every opportunity to urge folks to dust off those yellow books.

The buzz seemed to begin a few weeks ago after one of the infamous Big Five budget meetings, when Assembly GOP Leader Mike Villines told reporters that government reform should be back on the table. He and other Republican legislators have repeated these demands almost daily ever since.

At a meet-and-greet with new GOP legislators last week, Villines said he knows the CPR ideas aren't worth enough in savings to make a sizeable dent in the projected $11.2 budget this year, but that it's not the point.

"Things like [the CPR recommendations] are symbolic," he said. "I know it won't be a huge cut, but when you start doing those things, then Californians can say, 'Okay, we're open to a discussion on other things.'"

Other things, one presumes, would mean tax increases.

Sen. Dave Cox (R-Fair Oaks) took his own shot at yesterday's joint convention, using his alloted question time to lift the big books up for the cameras and suggest someone re-open them.

Democrats, though, seem unimpressed.

“It is not an answer," said Senate President pro Tem Darrell Steinberg last week, "to say, 'Well, government needs to just be more efficient, therefore we're not going to solve the [larger] problem."

But in the battle over messaging, Republicans must think that they've found a winner. Every GOP freshman I interviewed at last week's gathering mentioned the need to ferret out waste, fraud, and abuse. And their state party took up the cause this afternoon.

"Lawmakers need to find the waste and fraud," screamed a press release from the California Republican Party. "Democrat calls for even higher taxes to fund more of this waste only adds insult to injury."

Will the yellow books come back into play? Are there a few of the proposals that deserve a second look? Is the governor interested in trying again to blow up the boxes? Tough to say at this point; both sides admit these aren't big dollar items, but disagree on whether that matters.

At an event this morning at the state Capitol, Republican legislators and folks who provide Medi-Cal services pleaded for passage of an emergency appropriation to pay these providers who've been cut off from vital revenues in the absence of a budget.

(And by the way, because I was absent from Sacramento last week while on the convention beat, a hearty congratulations to everyone for setting a new record for the latest state budget in California history! That is, if you can congratulate someone on such a thing.)

GOP lawmakers, appearing this morning alongside some of the severely disabled who rely on these services, cast scorn on the governor and Democrats for not agreeing to temporarily replenish these funds.

"We have to get to a compromise budget," said Assembly GOP Leader Mike Villines. "We agree on that. But in the interim, why would you create innocent victims? And why would you use people as pressure in a budget?"

Neither Governor Schwarzenegger nor legislative Democrats have been all that keen on the emergency appropriation idea, with the governor calling such a plan a "Band-Aid" solution in a letter to legislative leaders last week. Instead, he said, both sides should just finally broker a deal.

While Republicans said today that their preferred budget would not further cut services to any of the Medi-Cal recipients who appeared with them at the news conference, it should be noted that both they and Schwarzenegger have suggested additional cuts in health and human services programs to balance the books.

Meantime, the "everything old is new again" feeling seems to be creeping back in, as the California Correctional Peace Officers Association appears poised to launch a recall effort against Schwarzenegger. The CCPOA remains locked in a bitter dispute with the Schwarzenegger administration over a new contract for its employees. Remember, too, that the CCPOA has sparred with Schwarzenegger in the past, and helped bankroll the effort that brought down all four of the governor's 2005 special election measures.

It will be interesting to see what argument they make in their formal recall petition, which would then have to be circulated for voter signatures, given that the guards' union was close to former governor Gray Davis in 2003, when Davis supporters accused recall backers of waging a politically motivated effort.

And if that wasn't enough drama, the Senate is scheduled to convene this afternoon to consider the GOP alternative budget plan... one which relies on borrowing against future revenues from the California Lottery and more cuts than Demnocrats have said they're willing to enact. In other words, the outcome of said vote is not expected to be in doubt... which means we'll be right back here tomorrow. Same bat time, same bat channel.

"It is time to stop putting people through this budget roller coaster ride," he said this morning. "It is time for Sacramento to have the guts and the vision to solve this budget problem once and for all."

The governor's comments at a news conference with local government officials again confirms just how stuck budget talks are here in the state Capitol.

And with every day that now passes, the impact will become more obvious to ordinary folks.

Two significant state payments that were supposed to go out today have now been put on hold: more than $434 million owed to community colleges and more than $1.3 billion in monthly payments to K-12 education. Remember, only two budget impasses have lasted longer than this one... and the all-time record delay in legislative approval is now just four days away. And no one really knows the full effect of what happens by next week.

But the way around the big philosophical budget dispute -- a short-term borrowing of money reserved for various services -- seems to be losing steam.

On Monday, Assembly Speaker Karen Bass was asked about whether she and Assembly GOP Leader Mike Villines were discussing just such a borrowing plan. Bass deflected the point of the question, but reminded reporters that the only other options for closing the $15 billion gap -- more cuts or new taxes -- are essentially off the table.

Schwarzenegger made it clear days ago that he opposes a borrowing plan to break the impasse; today's event was probably designed to remind everyone of where he stands. And local officials in Los Angeles were only too happy to back that up.

"We want the Legislature to know that we are not going to tolerate another raid on local government funds," said LA County Supervisor Don Knabe. "We are watching. We won't tolerate it, we won't accept it."

The legislative leaders and Schwarzenegger met in one of their well known "Big Five" meetings for about an hour this afternoon. And the first sign of discord came from Assembly GOP Leader Mike Villines, who left the meeting with a not-so-thrilled look on his face.

"You can talk to everybody else when they come out," Villines said as he walked away from the scrum of reporters outside the governor's office. "I don't think [the meeting] was very helpful at all."

Both Democratic leaders apparently left through a back door, thus avoiding any comment on the meeting.

And about 30 minutes later, Schwarzenegger -- who rarely comes out the front doors of his office -- decided to offer his own take on the status of budget talks.

"They all have their ideology, and I totally understand it," the governor said. "But I think we all have to give in order to make this happen."

He also urged legislators to stay at it... perhaps a reference to the around-the-corner national conventions for both parties, which begins with Democrats next week in Denver.

And the governor took special aim at his fellow Republicans, who have refused all proposals for a tax increase.... both Democratic calls for a hike in personal income taxes on the most affluent and Schwarzenegger's own suggestion of a temporary sales tax increase.

"The Republicans want to go out and borrow money, more money before we have paid off our debt," he said in his most pointed criticism to date of GOP legislators.

Schwarzenegger was referring to talk inside the Capitol of borrowing from voter-approved programs to help close the $15 billion budget gap. Several weeks ago, he mentioned the idea in a newspaper interview, but didn't specify who was pushing it.

"I think that's not a good idea," he said.

And then there was this:

"Everyone has to compromise. Anyone that says they don't want to compromise, I think, they're not doing a service to the state of California and to the people of California."

The full audio of Schwarzenegger's comments is below.

A spokesman for Villines denied that Republicans are advocating any new borrowing.

[update 5:14pm And the official response from Senate GOP Leader Dave Cogdill, with a slightly different take on the borrowing accusation: "If Democrats want to increase spending, they are going to have to either raise taxes or borrow money."]

Much ado was made yesterday of whether Democrats were drawing the idiomatic "line in the sand" over further cuts in state spending. But it doesn't take a trip out to the beach (which might be nice, considering the Sacramento heat wave continues) to know that sand drawings have a way of... disappearing.

With that in mind, here's a look at -- as of now-- what the political leaders have said they are, or aren't, willing to do.

TAXES: Republicans remain adamant that they're unwilling to accept tax increases as part of a budget deal. Even so, I'm still trying to decipher the words of Assembly GOP Leader Mike Villines in an interview almost a month ago after an anti-tax event on the Capitol steps: "There are going to have to be some things that we look at, potentially with the business community, to help us get out of this, and say, 'You know, if we give you some reforms, can you, you know, help us with some different kind of revenues?"

Of course, one could be persuaded that this isn't really a big deal, because "revenues" may not necessarily be "tax increases."

But the award for mixed messaging on taxes... thus far... must surely go to Governor Schwarzenegger, when asked yesterday whether he was rejecting Democratic calls for increasing taxes:

BORROWING, INTERNAL STYLE: Borrowing is one way of getting those elusive "revenues" without actually raising taxes. While there are pretty strong restrictions now in place on external, Wall Street borrowing (in the wake of Propositions 57 and 58)... there's always the chance that money set aside for other programs and projects could be dipped into to solve the problem. Some Republicans have suggested legislators might want to look at money collected under voter initiatives on tobacco taxes, transportation funding, and even mental health programs. But Senate President pro Tem Don Perata seemed to squelch such talk yesterday, saying it "goes against the promise" made to voters who support those programs.

SPENDING CUTS: This one seems just as hard for Democrats to swallow as a tax hike would be for Republicans. "We can't cut anymore," said Assembly Speaker Karen Bass. "Line in the sand? Yeah."

It will be interesting to see what lines stand the test of time once the budget is finally enacted, and what ones disappear once push comes to shove. As most Capitol watchers know, much longer standoffs than this one have become the norm when it comes to the budget.

There are more than 300 tax credits on the books, valued at about $50 billion. But can a budget solution really hinge on removing tax credits?

That's one of the questions examined in my report on this morning's edition of The California Report. And the answer seems to be: probably not.

The big problem is the size and scope of tax credits, exemptions, and deductions on the books. To get the most financial bang, lawmakers would have to go after tax savings laws that are enormously popular. But if lawmakers choose tax credits that aren't widely popular, then they have to erase a heck of a lot of them to make a real fiscal impact.

The discussion also highlights an enormous problem surrounding tax credits and exemptions: they can be placed on the books through a simple majority vote in each house of the Legislature, but taken off the books only with a supermajority vote... becasue such an action is considered a tax increase.

You can hear this morning's story below (a couple of minutes in to the newscast).

The above Problem (2)... the money... was the focus of today's announcement by GOP legislators of a proposed "fix" to the landmark $7.7 billion prison construction bond signed into law by Governor Schwarzenegger in May 2007.

The new proposal, SB 1705, gives the Department of Corrections and Rehabilitation more flexibility over how to spend the bond money, and attempts to expedite the design and construction process of expanding prison capacity.

It's somewhat unclear as to just who asked for the changes included in the new GOP bill. Republicans legislators said today that many of the changes were requested by Attorney General Jerry Brown, but a spokesman for Brown declined to comment on any requests that might have been made in "legal advice" between the state's lawyer and his clients.

Also unclear is whether these modifications to the 2007 prison bond will have any impact on the stalemate over a separate $7 billion bond to pay for prison health care needs, a bond measure blocked by Republicans and demanded by the federal court-appointed receiver for prison health care.

"I believe that, combined with this fix, that out of the Senate there are votes in order to move the receiver's bond forward," said Sen. George Runner (R-Lancaster).

But there wasn't the same level of confidence from Assembly Republicans. "I think we would just have to look at [the receiver's proposal] and see what it looks like," said Assembly GOP Leader Mike Villines (R-Fresno). Villines said he'd like to see some of the prison health care needs paid from the first bond package before borrowing more.

And even then, Democrats in the state Senate say that all of this still ignores the need for actually reducing the population behind prison walls.

In other words, the endgame in the prison crisis is still unclear, and the issue is the hottest of hot potatoes under the Capitol dome... looming large over an already ominous budget shortfall for the fiscal year that begins next Tuesday.

I mean funny like I'm a clown? I amuse you? I make you laugh?"

The new federal court receiver for prison health care, Clark Kelso, has a reputation for a calm and reasoned demeanor. And yet, I can't get Joe Pesci's tough guy character from Goodfellas out of my mind.

This morning, Kelso filed documents with U.S. District Judge Thelton Henderson again demonstrating his intentions to get the money he says is needed to bring California's prison health care up to constitutional standards.

Kelso's new filing adds Controller John Chiang to the state officers listed as defendants. The receiver also filed a request to begin a legal discovery process at Chiang's office to examine the state's bank accounts.

“The reason is simple," says Kelso's filing. "The State has declined to fund major capital projects the Receiver considers essential to fulfilling the charge given to him by this court. As a result, the Receiver may find it necessary to ask this court to order the Controller to draw warrants on the State Treasury to provide the Receiver with the necessary funds."

Today's action is just the latest ratcheting up of the pressure. Last month, Republicans in the state Senate refused to provide votes for a $7 billion bond proposal to improve prison health care.

Part of the problem, said Assembly GOP Leader Mike Villines, is the price tag. Villines, in comments to reporters on Wednesday, said the proposal is the equivalent of giving a mid-size city lavish health benefits.

"We have someone [Kelso] saying they need $7 billion for 180,000 population," Villines said. "It seems astronomical, and it doesn't seem well justified."

Goodfella Tommy DeVito wouldn't like that answer. And it seems doubtful Kelso or the federal courts will, either.

UPDATE [3:30pm] In a written statement, Controller Chiang paints a gloomy picture if the courts simply come in and pluck the money needed from the state's bank account: "If the Court does order the State to make payments as requested by the Receiver, we would be forced to tap transportation, victim’s compensation, mental health and other special funds earmarked by voters for specific purposes. Such action likely would invite protracted and costly litigation at taxpayer expense."