Big ideas bobbing on a rising tide of red ink

Maybe Gov. Arnold Schwarzenegger and Democratic legislative leaders deserve credit for courage and chutzpah. But what they’re doing seems cockeyed.

It’s a hard one to explain and rationalize. They appear to be living in denial.

On Monday, the governor ordered his agency heads to prepare for 10% spending cuts. State government is drowning in red ink, with the projected deficit for the next fiscal year growing to $10 billion, roughly 10% of the general fund. Many Capitol veterans wouldn’t be surprised if the hole got a lot deeper.

On Tuesday, Democratic leaders offered a $14-billion healthcare expansion plan as the basis for compromise with the governor. The Schwarzenegger administration praised the proposal as “a step in the right direction” even as it prepared to cut existing healthcare programs.

Schwarzenegger also continued to talk about 2008 being “the year of education reform.” He’s even willing to discuss asking voters to raise taxes to improve schools -- while his administration is mulling possible education cuts.

Meanwhile, the state’s most pressing need -- because there’s truly a disaster in the making -- is to upgrade California’s water storage and delivery system. But negotiations are going nowhere, bogged down in a Democratic anti-dam and Republican pro-dam quagmire.

Water negotiators had hoped to reach a compromise in time for the Legislature to place a proposed water bond on the Feb. 5 presidential primary ballot. But Senate President Pro Tem Don Perata (D-Oakland), the Democrats’ lead water negotiator, conceded to me Tuesday that “we can’t make the February ballot.” He added, “I would not rule out June.” To make the June state primary ballot, the Legislature must pass a bond measure by late January.

Bond financing is borrowing. As with home mortgages, you can figure on paying double the sales price -- principle and interest -- over the life of a 30-year loan. Who exactly would pay off the water bonds is a hot argument in negotiations. Some payments would be made by water users, such as irrigation districts. But much of the cost would be borne by the overall public and become another burden on the state general fund.

So you get the picture: The Capitol is like a family that’s losing income, but going ahead with plans to build new rooms on a house deteriorating from dry rot.

This governor isn’t a just-repair-the-rot kind of guy. No small projects for him.

One indispensable Schwarzenegger asset is his optimism, but he sometimes seems to be living in fantasy land.

Check out these comments last Friday to a business group in San Jose:

“There are some people that think that we should do things in an incremental way. You know, take one step at a time. Well, if you can live for 1,000 years, then we can do that. . . . I have another three years left [in office] . . . .

“Do you want to go, like with healthcare reform, do one year just children, then the next year anyone that is employed and then the next year. . . . I think you have to have a big vision and you’ve got to say, ‘We’ve got to insure everyone. Let’s go for the big shot’. . . .

“And the same with education. . . . If extra money is needed, which is something we have to look at, we have to have an open mind and say to ourselves, ‘OK, first we have to change the structure and make education much more efficient.’ Then it may still need more money. And then I think we should go to the people and just say, ‘Do you want to put more money into education?’ ”

But these days, incrementalism shouldn’t be viewed as a pejorative. Even small steps toward solving big problems would be welcomed, I suspect, by a public soured on political polarization and gridlock.

What makes people even more cynical is getting excited about a potential government offering -- such as universal healthcare coverage -- and then watching the politicians fail to deliver.

Schwarzenegger and Democrats, however, aren’t far apart on a healthcare compromise. (Republicans, as anti-tax incrementalists, are ignored.)

The governor and Democrats have agreed to tax hospitals 4% of their revenue to help finance affordable medical coverage for everyone. They’ve agreed on the concept of taxing employers who don’t currently provide coverage for workers. Schwarzenegger proposes up to 4%, depending on company size; the Democrats’ new offer is for up to 6.5%.

They part over a $2 per pack cigarette tax that Democrats proposed Tuesday.

When all else fails, Democrats and so-called reform groups habitually turn to the cowardly cigarette tax because, since most voters don’t smoke, they don’t pay. Perata previously had said this about the tax: “You’re betting against yourself. You’re hoping people start smoking . . . in order to be able to have a revenue stream. I just think, you know, we want to get away from that.”

Perata said Tuesday he now supports taxing cigarettes for healthcare because “there are very few options.”

Assembly Speaker Fabian Nunez (D-Los Angeles) agreed, and said of the worsening budget deficit: “No question we’re going to have a huge fire to put out. It’s looking more and more like a forest fire.”

They might want to help douse that fire with a cigarette tax. But this is a lousy revenue source for healthcare because it’s gradually declining while medical costs are rapidly rising.

Actually, this would be an opportune time for Capitol politicians to reform many things: a volatile tax structure that’s too dependent on affluent-income taxpayers, autopilot budgeting that is straitjacketed by past ballot initiatives, an education system that is the biggest gobbler of tax money but clearly needs reforms, and a healthcare system that leaves 6.7 million uninsured during any given year. It all fits together: the money, the policy, the politics.

That’s probably too much to expect.

Universal healthcare could be worthwhile and admirable. But the state’s budget structure -- the dilapidated house -- should be shored up along with adding on a costly new program.

george.skelton@latimes.com