Schwarzenegger's budget proposes tax hikes, steep cuts

By Jordan Rau and Patrick McGreevy

Jan. 1, 2009 12 AM PT

SACRAMENTO —

Gov. Arnold Schwarzenegger’s administration Wednesday rushed out its latest plan to cut state spending, raise taxes and borrow heavily to stop California’s budget deficit from climbing to $41.6 billion by mid-2010.

Mike Genest, the governor’s finance director, said the state’s financial troubles were so urgent that the administration wanted to release its budget plan for the next fiscal year -- due Jan. 10 -- as early as possible in hopes feuding lawmakers would move quickly to avoid what Schwarzenegger has called a “financial Armageddon.”

“The governor believes in acting immediately,” Genest told reporters at a news conference in the Capitol -- a gathering that did not include the governor, who was in Sun Valley, Idaho, with his family on vacation.

The governor’s new budget plan is based on previous strategies that have failed to win traction in the Legislature. Republican lawmakers quickly said they would not support it, and Democrats indicated it would be of little help in resolving the stalemated negotiations their leaders have been holding with Schwarzenegger for weeks.

The new budget plan, which would need approval from the Legislature, again illustrates the kind of painful options that face lawmakers as they try to deal with a disintegrating economy that has left the state treasury bare.

California is now on track to run out of money as early as February. The state has frozen spending on public works projects because investors will not issue short-term loans, fearing the state’s finances are in such disarray that they might not get their money back.

The new proposal adds on to the already severe plan he proposed in November. On top of a 1 1/2 -cent sales tax increase and new levies on alcoholic drinks and the oil industry, this plan would also reduce to $103 from $309 the dependent credit Californians could claim on their 2009 income taxes.

The cuts in the proposal are deep, including a reduction of billions of dollars in K-12 education spending from current levels and shortening the school year by five days. State university and community college offerings would also be cut back as tuition and fees go up. Healthcare programs for the poor would be slashed, as would welfare for the elderly and disabled. The fees for affluent people with assets in the state’s veterans homes would rise.

The plan also includes reductions in the state workforce, which the governor is already trying to put in place through executive order. Public employee unions have sued to block the order, which would require state workers to take days off without pay, amounting to a pay cut of roughly 10%.

Genest said the state is already so deep in the red that it will not be able to get through this year without purchasing an unconventional $4.7-billion bridge loan that is certain to saddle taxpayers with steep interest charges -- presuming investors can even be found in this tight credit market.

The governor’s latest plan, like its predecessor, faces little chance of passage since GOP lawmakers have held firm against tax increases. Nonetheless, the governor included several sweeteners Republicans have been requesting, including reviving parts of his 2004 plan to reorganize state agencies and dipping into cash that voters set aside for new projects to help young children.

The new plan tweaked Senate President Pro Tem Darrell Steinberg (D-Sacramento) by proposing to take $226 million from a special fund voters dedicated for new mental health programs under Proposition 63 and use the money for the state’s existing programs. Steinberg was the author of that 2004 proposition and considers its a career highlight.

“That is a nonstarter for me,” Steinberg told reporters in a conference call. “The fundamental problem with what the administration laid out today is they don’t bring a single Republican vote to pass the revenue part of their proposal.”

GOP leaders said that, although appreciated, those new provisions would not make them change their minds. “Republicans cannot support the governor’s proposal to impose $14 billion in higher taxes on Californians,” said Assembly GOP leader Mike Villines of Clovis.

There was little in this plan to help resolve the governor’s ongoing impasse with Democratic legislators, who last month pushed through a plan that would have wiped out $18 billion from the deficit with cuts and increased taxes on sales, gasoline and personal income. The Democratic plan was crafted in an unorthodox way that they assert would allow them to raise taxes without needing a two-thirds majority vote that would require Republican support.

Although Republicans say the plan is illegal and are threatening lawsuits, Schwarzenegger has signaled that those taxes are generally acceptable to him.

However, the governor has refused to sign the plan unless legislators also ease environmental protection on public works construction, turn over some of the construction to private companies and pass other measures that he says will help the economy. The Democrats have offered some concessions, but the governor’s aides say they are not substantial enough.

Negotiations remain in limbo. While on vacation, Schwarzenegger has held videoconferences with Democratic leaders and aides who assemble in his Capitol office.

This is the first time in Schwarzenegger’s tenure that his administration has announced its annual budget without the governor actually being present.

The governor’s office defended his decision to continue his vacation, which began more than a week ago, saying he canceled every previous family trip in 2008 as well as several prestigious invitations -- including the annual meeting of the World Economic Forum in Davos, Switzerland, and the Republican National Convention, because of the state’s persistent budget problems.

The budget plan released Wednesday does not include the actual legislation he must provide. Aides said Schwarzenegger would submit those documents Jan. 9.

jordan.rau@latimes.com

patrick.mcgreevy@ latimes.com

Times staff writer Evan Halper contributed to this report.

(BEGIN TEXT OF INFOBOX)

Addressing the budget shortfall

Gov. Arnold Schwarzenegger wants lawmakers to approve several new taxes and deep cuts in government services to close a projected $41.6-billion gap through mid-2010. Among them:

TAXES

* Raise the state sales tax by 1 1/2 cents on the dollar.

$9.5 billion

* Extend sales tax to include several services and event tickets.

$1.4 billion

* Tax oil companies 9.9% on every barrel of oil extracted from California.

$1.2 billion

* Tax alcoholic beverages 5 cents per drink.

$829 million

CUTS

* Shorten the school year by five days.

$1.1 billion