With Extra $5 Billion, Governor Plans to Pay Debt, Aid Schools

Gov. Arnold Schwarzenegger plans to retire a large chunk of the state’s debt and boost education funding with more than $5 billion in unexpected revenue from surging tax receipts, according to documents obtained by The Times.

The governor will offer details on the windfall, and the plan for spending it, in a revised budget proposal on Friday. The billions he will propose returning to schools promise to help him end a bruising political battle that has dogged his administration.

The revised plan builds upon the $125.6-billion spending blueprint Schwarzenegger presented to the Legislature in January. The earlier budget was criticized by fiscal conservatives for continuing to commit more spending than the state was projected to bring in and by Democrats for not doing enough to restore some of the programs that had been eroded through three years of budget cuts.

Since then, the strong stock market and business gains that were more robust than anticipated led to record April collections for the state. The $5 billion in extra cash goes a long way in the state budget, allowing the governor to increase debt repayment, meet the demands of school groups and still have some extra left over for his own pet programs.

His plan calls for paying off $3.2 billion of California’s debt a year earlier than scheduled and building the largest budget reserve the state has had since 1978. The administration would also create a special fund for transportation projects with hundreds of millions of dollars in extra sales taxes from soaring gasoline prices.

The surprise infusion of money, from a state economy that has outperformed most analysts’ predictions, comes at an opportune time for the governor. He is gearing up to run for reelection in November and touting an ambitious public works borrowing plan that voters will consider on the same ballot.

His revised budget would reduce the financial burden of that $37-billion borrowing plan on future generations, making it an easier sell.

Administration officials refused to comment about the plans, which The Times learned about from briefing papers given to legislators and school groups that helped craft the governor’s education proposal.

The plan will be submitted to the Legislature for a series of hearings in the coming weeks. Lawmakers have until June 15 to approve their version of the plan. A two-thirds vote is required, meaning that support from both parties is needed.

The plan would make the infrastructure ballot measure considerably easier for the state to absorb by limiting an increase in the proportion of the budget spent on debt repayment.

Administration documents show that soaring gas prices could lead to the state’s collecting as much as $800 million in extra annual sales tax in coming years.

The windfall threatens to prompt a backlash among voters, who may demand a reduction in the tax.

The administration’s plan attempts to show that the state would use the money responsibly -- to pay back for the transportation projects proposed as part of the November bond package -- instead of dumping it into the state’s general fund.

News of the governor’s proposal was met with guarded optimism by lawmakers.

“We’re thrilled to hear that they’re going to use a lot of these new revenues to pay down debt and make sure that we’re not going to saddle future generations,” said Assembly Republican leader George Plescia of San Diego. “I don’t see how you can argue for more spending on programs before we take care of the debt.”

Democrats were more reserved. They said that although they embrace the concept of paying down debt, they would also like some of the extra money to go to restoring social programs for which spending has been restrained in recent years.

“You can’t put aside billions of dollars to retire debt while at the same time cut back on essential programs and services to senior citizens and the poor,” Assembly Speaker Fabian Nunez (D-Los Angeles) said.

Nunez, who has been demanding more money in the budget for schools, declined to comment on Schwarzenegger’s plan for that area.

That school plan came together this week in an agreement between the administration and the education lobby. Officials involved would speak only on the condition that they not be identified because the governor has not yet announced the deal. They said the new money would help restore the governor’s battered relationship with school groups.

Under the agreement, schools would be repaid more than the $3 billion education groups say they are owed because of cuts imposed in leaner times. An additional $2 billion would be provided for low-achieving schools, to help cover the cost of various state-mandated programs, and to create arts, physical fitness, vocational education and other programs.

The money would be paid over the course of several years, starting with a $2-billion down payment in the budget year that begins July 1.

The officials said it would settle a lawsuit filed last August against the administration by the California Teachers Assn. and state Supt. of Public Instruction Jack O’Connell. The governor’s refusal so far to repay that money has prompted school groups to attack him continuously, including in a series of television ads that helped defeat every ballot initiative he campaigned for in last fall’s special election.

The rest of the money would be allocated to specific programs, including a physical education initiative and other pet projects of the governor. It would be the Legislature’s job to divvy up those funds.

The education proposal is likely to win the governor points with school groups and Democrats, and the emphasis on debt repayment is already proving popular with his conservative base.

But just as the Democrats are wary that too much money may be proposed for debt repayment, Republicans are expressing concern that the governor will propose allocating too great a share to schools.

Senate Republican leader Dick Ackerman of Irvine said that although he applauds the governor’s plan to create a $2.2-billion budget reserve, he would like to see even more of the money set aside.

“This is certainly a very strong step,” he said. “We basically say any extra money should go to pay the debt down further.”

*

Times staff writers Peter Nicholas, Jordan Rau, Robert Salladay, and Nancy Vogel contributed this report.