Schwarzenegger signs California's family silver to help pay off debts

No American politician is getting into the recession-era spirit of cost-cutting more completely than the Californian Governor, Arnold Schwarzenegger, who is inviting citizens to raise dollars for the state by attending a garage sale of its property at the end of August. And who knows, he says: he may autograph a few of bits and bobs to sweeten the deal.

But such money-saving measures – items up for grabs range from office furniture to official cars – will soon be put in the shade: the Governor's pitch comes just as the state appears to be pulling itself from the brink of bankruptcy. He and party leaders in Sacramento have at last negotiated a budget deal that should close a $26.3bn (£16bn) deficit and put the state finances back on track, for now – at the cost of vast cuts to public services.

The draft budget, to be put to a vote in both houses of the state legislature tomorrow, is a painful prescription.

As well as cuts in spending, it includes steps to borrow and shift money to help plug gaps. However, it includes no tax increases and its final adoption this week seems likely. "All around I think it is really a great, great accomplishment," said Mr Schwarzenegger, comparing the negotiations to a Hollywood suspense film.

After earlier efforts to pass a budget failed, officials said that the state could go broke before the end of July and took the unusual and controversial step of printing IOUs for some state contractors and vendors.

While state governments all across the US have been struggling to balance budgets amid the toughest recession since the Second World War, the plight of California, the world's eighth largest economy, has been especially acute. Revenue from personal income tax plunged 34 per cent in the first half of this year. Aside from facing the prospect of running out of cash, it was further humiliated when its credit rating slipped towards junk status.

Mr Schwarzenegger first mentioned the state jumble sale earlier this month. He confirmed it on Monday using Twitter. Some items will be sold on the internet. He appeared to agree,with a suggestion from one of his Twitter followers that signing some of the items could increase their value. (He was once, after all, a Hollywood star.) "That's a great idea," he said.

Under the putative budget deal, public schools, universities and colleges will be bracing themselves for $9bn in cuts. Many state employees will be asked to continue taking three furlough days off a month without salary, equal to a 14 per cent pay cut. The prison system will see its budgets slashed by $1bn. However, an earlier proposal to sell off the San Quentin State Prison and the Los Angeles Memorial Coliseum penitentiary was not included in the deal.

The Governor will be permitted to sell other public properties, including the state fairgrounds. Some state parks will be permanently closed, though not as many as feared.

While the IOUs were still being issued yesterday, they would presumably be replaced by proper dollar payments to vendors and to some taxpayers as soon as Mr Schwarzenegger adopts and signs the new budget.

"This is, of course, one of the most difficult economic times to face our state since the Great Depression, so none of these were easy choices," said Sam Blakeslee, the Republican minority leader of the state Assembly. "I think we selected a path which will lead the state back to the point where we will be strong." The $26.3bn hole amounted to nearly 30 per cent of all spending from the state's general fund. "This is a sober time because there isn't a lot of good news in this budget," said the Senate majority leader Darrell Steinberg, a Democrat. "We have cut in many areas that matter to real people but I think we have done so responsibly."

Among those expected to be hardest hit by the budget are the state's poorest citizens who depend on state programmes to help them with health-care and schooling.

In a victory for Mr Schwarzenegger, the agreement includes provisions for new oil exploration off the coast near Santa Barbara which in theory could swell state coffers by $1.8bn a year once on stream. The move has been fiercely opposed by conservation groups and it will be the first time in more than 40 years that political leaders will have sanctioned new off-shore drilling operations in California.