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California budget fix could raise sales taxes

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Legislative leaders are drafting a complicated scheme to help close the state's massive deficit by raiding funds voters have set aside for transportation and local government services, Gov. Arnold Schwarzenegger said Thursday, adding that it probably would force a state sales tax hike.

"It is not a good idea," the governor said in an interview with The Times. But Schwarzenegger, anxious to get a budget passed before the state experiences a cash crisis, did not rule out signing off on such a plan.

During the half-hour interview in his office, the governor offered a broad outline of the proposal being discussed in closed-door budget negotiations. Schwarzenegger, who seemed exasperated by his inability to fix California's fiscal dysfunction five years into his governorship, cited the borrowing plans to bolster his point that the state's budget system was in need of reform.

The proposal is being considered as part of a possible compromise between Democrats seeking to close the deficit with $5.6 billion in income tax hikes on the rich and Republicans vowing to block any new taxes.

The legislative plan would balance the state budget with the help of $1.1 billion voters set aside for transportation projects and at least $1.4 billion earmarked for local governments under Proposition 1A, which was approved in 2004, Schwarzenegger said. State law requires that the money be paid back -- at a steep interest rate -- in three years.

In order to ensure that the money is repaid, "I literally would have to guarantee that with a sales tax or something," Schwarzenegger said. "Where [else] do we get the revenues that someone can be saying so freely we can pay back this $2.5 billion we are borrowing?"

Officials involved in the confidential budget negotiations, who agreed to speak on condition of anonymity, said lawmakers also were looking to borrow $200 million voters set aside for early childhood education programs through 1998's Proposition 10.

Local officials and advocates for the programs expressed alarm at the proposal to raid their funds. They accused legislative leaders of ignoring the will of voters, who approved the measures to prevent the state from touching the money in question.

"The money they would take is going to fund a huge amount of projects," said Jim Earp, executive director of the California Alliance for Jobs, a construction trades group. "It would be a complete violation of the spirit of Proposition 1A."

Earp said transportation advocates were mobilizing a campaign against the plan. He said direct mail would urge lawmakers to vote against it if it is included in the final budget deal.

In Los Angeles County, the proposal would force further cuts in healthcare and human services, and probably affect other programs, said county Chief Executive Officer William T Fujioka. He said the county would lose as much as $145 million this year.

"The human and social impact would be significant," he said.

Schwarzenegger expressed frustration that California may once again return to borrowing. He argued that if the state were to impose some spending restraints -- or at least require lawmakers to build substantial rainy-day funds -- the perpetual budget crises would stop.

"It is a self-inflicted situation we are in," Schwarzenegger said. "We know what the problem is, and we know this is the only way it can be fixed, but we are unwilling to do it."

For the third time this year, the governor is trying to make changes in the state Constitution that would require that money be put aside in good economic times. His first attempt, in 2004, was watered down by the Legislature, ultimately resulting in a weak reserve that was quickly wiped out when the state's revenue began to slow. That was followed by a ballot proposal that Democrats and labor groups warned would strangle government; it was defeated by voters in 2005.

"There was $100 million spent against it" and other unsuccessful ballot measures Schwarzenegger championed that year, he said, "because God forbid we should fix something."

Democrats say it is the governor who is exacerbating the state's financial problems, by refusing to recognize that California needs more revenue to provide the services polls show voters want. Schwarzenegger's first action in office was to cut vehicle license fees, a move that is now costing the state as much as $6 billion. Democrats say the state needs that money, and that imposing spending restraints without replacing it would ultimately reduce government services substantially.

The standoff has allowed California's fiscal problems to grow under the governor's watch, even as other states have implemented reforms. In a recent ranking by the nonprofit Pew Center on the States, California's budget system received a D-plus, the lowest grade given any state.

Schwarzenegger's role in the budget process has been limited this year. Lawmakers complain he is often out of state boosting his national profile.

But the governor says he has met his deadlines for presenting budget plans, and that his attempts to get lawmakers to work on the problem throughout the year were rebuffed.

Schwarzenegger twice during the interview mentioned how Senate Leader Don Perata publicly implied that the governor should butt out of budget deliberations, saying that if he wanted to be involved, he should run for the Legislature.

"I kept saying all spring, 'Guys, don't wait until the last minute,' " Schwarzenegger said. "Then Perata makes his statement that 'He shouldn't be telling us what to do.' We don't have the luxury to improvise this year. We are running out of cash."

The delay in dealing with the budget problem, the governor said, ultimately spilled over into other business at the Capitol, making it impossible to achieve anything of substance.

Schwarzenegger said he ranks the bills the Legislature sends to his desk into weight categories, a nod to his days as a bodybuilder. This year, he said, there is "very rarely a heavyweight bill."

"We can't move the state forward because everyone gets frozen," he said.

evan.halper@latimes.com

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