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Reporting from Sacramento –

A plan to fill last summer’s $20-billion budget hole in part by selling a chunk of the state-run workers’ compensation company is now so bollixed up in court that it’s hampering Gov. Arnold Schwarzenegger’s effort to devise new ways for reducing a similar deficit this winter.

Last summer, the governor convinced state lawmakers that he could raise $1 billion by getting investors to buy some of the business of the century-old State Compensation Insurance Fund.

That idea was one of a handful of creative solutions and accounting maneuvers concocted to balance the $90-billion, recession-wracked spending plan, at least on paper.

But the planned sale of part of the State Fund was tied up in court after California Insurance Commissioner Steve Poizner filed a lawsuit contending that a sale could weaken the insurer, raise premiums for thousands of employers and damage an already weak state economy.

“State Fund was set up in the California Constitution for the sole purpose of supporting the workers’ compensation system,” Poizner said. “It’s not there for the purpose of taking out money.”

The upshot means “we can’t move forward until there is a resolution of this suit,” said H.D. Palmer, a spokesman for Schwarzenegger’s finance department.

So the governor and the Legislature will need to come up with $1 billion more in savings or revenue.

The collapse of the proposed deal — at least during the current fiscal year ending June 30 — makes the already tough job of crafting a balanced budget even tougher, said Allan Zaremberg, president of the California Chamber of Commerce.

“It’s an issue with a lot of complications,” Zaremberg said, stressing that he understood why policymakers grasped at a potential solution that turned out to be somewhat “illusionary.”

Democrats opted to go along with the proposed sale rather than cut more deeply into health and welfare programs, while Republicans favored it to fend off demands for tax increases.

“It’s an understatement to say that we don’t have easy answers, because we don’t have answers period at this point in time,” Zaremberg said.

The idea of selling part of the State Fund, though popular with lawmakers, met with skepticism from insurance industry executives and small businesses that depend on the state-backed program.

Rumors that a consortium of investors might have been interested in buying some of State Fund’s financial reserves and liabilities “quickly died out,” said Mark Webb, vice president for governmental relations of Employers Direct Insurance Co., an Agoura Hills workers’ compensation company.

Many businesspeople, Webb said, viewed the proposed sale as a cynical ruse meant only to balance the state’s budget temporarily.

“It takes on a kind of monopoly-money scenario because we all know it’s not real,” he said.

Reliance on financial solutions that “are dubious at best” is part of the reason that California’s budget deficits drag on from year to year, especially during hard economic times, said Jean Ross, executive of the California Budget Project, which lobbies for poor and working-class families.

Schwarzenegger should be more realistic if he tries again to raise $1 billion in revenue by selling part of State Fund when the governor introduces his proposed 2010-11 budget in early January, said state Sen. George Runner (R-Lancaster).

“We can’t keep pretending a potential sale is out there when clearly it isn’t,” he said.

marc.lifsher@latimes.com