July 22 (Bloomberg) -- California’s efforts to close a $26 billion budget deficit drew suspicions from top Republican legislators amid concern that it would include the early release of thousands of prison inmates.

The debate about releasing prisoners emerged yesterday as lawmakers drafted more than two-dozen bills needed to enact budget cuts agreed to by Governor Arnold Schwarzenegger and legislative leaders on July 20.

Assemblyman Sam Blakeslee, a San Luis Obispo Republican who helped negotiate the deal, said the early release of 27,000 inmates wasn’t part of the discussion.

“Budget negotiations depend on the good faith actions of all parties,” Blakeslee said in a statement to reporters. “We made it abundantly clear during negotiations that such policies would endanger the public and were unacceptable.”

The qualms may complicate the passage of spending cuts, borrowing and funding shifts needed to erase a deficit in the $100 billion budget that has pushed the most-populous U.S. state close to insolvency. The failure to reach an agreement to balance California’s books forced officials to pay bills with IOUs this month and pushed the rating on $72 billion of bonds closer to non-investment grade.

Schwarzenegger’s prison secretary, Matthew Cate, told reporters that it was misleading to say the proposal would lead to the early release of 27,000 inmates. He said the plan would reduce the state’s prison population by that many through various means, including sentencing reforms that would prevent some people from going to prison in the first place.

“It’s unfair to describe it that way,” Cate said, referring to early release. “It’s misleading. It makes it sound like we are opening the gates, and that’s just not the case.”

Fund Diversion

The budget deal also drew opposition from groups representing cities and counties that said local governments would sue to stop California from using about $2 billion of local gas-tax money and redevelopment funds to balance the books.

Diverting the money would exaggerate the fiscal problems localities are facing from the recession, which has already battered the state’s tax collections, officials said.

“They don’t want to cut spending and they don’t want to raise taxes,” said Chris McKenzie, the executive director of the League of California Cities, referring to Schwarzenegger and the Legislature. “They find it’s easier to steal the money.”

Senate and Assembly leaders said they will seek to put the deficit proposals to a legislative vote tomorrow. It would require passage by a two-thirds margin. While Democrats control both chambers of the Legislature, they are six votes shy of such a supermajority.

Previous Debate

In February, a budget agreement reached by Schwarzenegger and Republican leaders nearly collapsed until round-the-clock bargaining sessions led enough Republicans to break ranks with their party to pass it.

Cameron Smyth, the chairman of the Republican Assembly caucus, said there wouldn’t be sufficient support within his party this time to release prisoners before their terms are served, though he said there is time to address such concerns.

“There are not going to be votes for early release of prisoners,” he said. “Things are still getting worked out. We need to move forward, but we need to move forward without the early release of prisoners.”

Prison provisions include reviewing the cases of 8,000 inmates in the country illegally and having them deported or handed over to federal corrections. Others convicted of non- violent crimes such as check fraud would be given credit for time served and their sentences reduced. Others would be released to home monitoring.

‘No Support’

“There’s no support from any Republicans for any budget proposal that includes early release,” said Senator Dennis Hollingsworth, a Republican leader representing Riverside and San Diego counties.

Hollingsworth said he and other negotiators agreed that dealing with the prison cuts would be addressed with after the budget bills were passed.

To contact the reporters on this story: William Selway in San Francisco at wselway@bloomberg.net; Michael B. Marois in Sacramento at mmarois@bloomberg.net;

Last Updated: July 22, 2009 00:01 EDT