Governor teeters on edge of deficit abyss

SACRAMENTO -- Gov. Arnold Schwarzenegger swept into office in 2003 promising to end the state’s pattern of “crazy deficit spending,” cut up the government credit cards for good and force the state to finally live within its means.

So much for that.

Experts say the state’s spending habits are no more restrained than they were when Schwarzenegger arrived in Sacramento four years ago. The budget has grown by a staggering 40%. Costly programs have been launched.

And spending has continued to outpace tax receipts year after year -- even years when housing and tech booms led to cash windfalls.

Now the governor finds himself in a predicament similar to that of his predecessor, Democrat Gray Davis: staring at a crippling budget shortfall that threatens to overshadow all other business in the Capitol and tarnish his political legacy.

On Monday, Schwarzenegger ordered all state agencies to prepare plans to cut spending across the board by 10% next year. Education, transportation and healthcare will all be affected. Some programs face elimination. Layoffs may loom. The state’s budget shortfall, thanks largely to the troubled housing market, has ballooned from a few billion dollars projected at the beginning of the year to $10 billion.

Experts are not surprised.

“There has been lots of talk and lots of gimmicks, but none of the state’s underlying budget problems have been dealt with,” said Ryan Ratcliff, an economist at the UCLA Anderson Forecast. “Even in the middle of a revenue boom, we kept spending more than we take in.”

Candidate Schwarzenegger condemned such fiscal policy in 2003. He challenged voters frustrated with the state’s mismanagement of the budget to oust Davis. Now, on his watch, the same problems are creeping back.

The governor has at times tried to right the ship -- most notably with the “Live Within Our Means Act” that he championed in the 2005 special election, a measure that would have capped spending growth. The proposal was a flop. Voters rejected it by a wide margin.

He also called for an end to “autopilot spending” -- healthcare, education and other programs that are guaranteed under state law to get substantial increases in tax dollars every year. That spending accounts for about three-quarters of the budget, leaving lawmakers few places to turn even when they can muster the will to cut.

The appeals, just like efforts made by Davis, never gained traction in the Legislature.

Schwarzenegger argues that he can’t go it alone.

“These deficits are chronic because of the formulaic nature of the budget,” said administration spokesman Adam Mendelsohn. “The governor has always believed that budget reform must start with a discussion about the formulaic nature of the budget.”

Mendelsohn points out that the governor inherited a deficit of about $16 billion and has made progress chipping away at it. He says budget reform will again be a priority on the governor’s agenda next year.

Democrats, however, complain that the governor has offered only conservative fiscal ideology, not a willingness to fix the state’s budget problems through compromise. If the route to long-term financial stability is to cut spending, raise taxes or do some of both, the governor so far has ruled out all options but the first.

Schwarzenegger’s first act in office was to cut the car tax, saving drivers an average of $200 a year and costing the state nearly $6 billion a year.

“The governor created a massive, chronic hole in our budget his first day in office,” said Assembly Appropriations Committee Chairman Mark Leno (D-San Francisco).

Such moves have led budget analysts to question whether the governor is more motivated by political expediency than fiscal prudence.

“This is a guy who got elected by claiming he is not a politician and then acted exactly like a politician,” said John Ellwood, professor of public policy at UC Berkeley. “Now the chickens are coming home to roost.”

Ellwood credits Pete Wilson, who led the state from 1991 to 1999, with being the last governor willing to endure the pain involved in confronting a chronically unbalanced budget. Wilson, facing what was then one of the biggest budget crises in state history, demanded billions of dollars in spending cuts. But he also accepted a compromise with Democrats that included some tax hikes -- something Schwarzenegger has ruled out.

The conservative wing of the Republican Party never forgave Wilson. A group of activists burned him in effigy at a state convention. “The lesson there was you don’t get any credit for being responsible,” Ellwood said.

Schwarzenegger took an alternate route. He cut the car tax, championed a plan to balance the budget with $15 billion of borrowing and rode a wave of good economic luck that allowed the state to hobble along when revenues exceeded projections year after year.

“If you put yourself in a vulnerable situation, you have to expect your luck is going to run out,” said Daniel J.B. Mitchell, a professor of management and public policy at UCLA. “Now the luck seems to have run out.”

evan.halper@latimes.com