Governor, Democrats Close to Deal on Spending Limit, Bonds

Gov. Arnold Schwarzenegger appeared close to closing a budget deal with Democratic legislative leaders Wednesday but faced skepticism within his own Republican ranks. The deal would include floating $15 billion in bonds to balance this year’s budget and setting a spending limit that would prohibit borrowing in the future to overcome revenue shortfalls.

The development came on the same day that several thousand demonstrators descended on the Capitol to protest Schwarzenegger’s proposed budget cuts and the loss of revenue for local governments caused by his elimination of the $4-billion car tax increase.

Democratic leaders scheduled sessions on the bond and spending limit proposals in the Assembly today and in the Senate on Friday.

Schwarzenegger spokeswoman Margita Thompson said: “We’re still working. The governor is optimistic. People are at the table and seem engaged on all fronts in trying to get the issues before the voters in March, which is in the state’s best interests.”

But the plan, a compromise struck between Schwarzenegger and Assembly Speaker Herb Wesson (D-Culver City), faced resistance from lawmakers within the Republican governor’s own party.

Senate Budget Committee Vice Chairman Dick Ackerman (R-Irvine) said there was little to like in the proposal, which the governor had yet to discuss with Senate Republicans by Wednesday evening.

“I don’t think it looks very good,” Ackerman said. “At this point in time, after talking to our leadership, I’m not convinced there is a deal. He hasn’t asked us on this one yet. He may not be to the point where he wants to talk to us.”

The measure would not strictly cap state spending with a formula tied to population growth and per capita income, as Schwarzenegger had proposed. Instead, it would require the Legislature to spend no more money than the state took in as revenue. How revenue would be determined remained under negotiation Wednesday.

“It makes it clean, it makes it simple, and you will always be able to count on ‘X’ amount of dough,” Wesson said.

Building a Reserve

The plan would also put at least 1% of revenue each year into a reserve that could be tapped in tough economic times. The $15-billion bond issue would be paid off in 15 years, half the time the governor originally proposed.

Staffs for legislative leaders and the governor were expected to work late into Wednesday night, putting the proposals into bill form.

To be placed before voters on the March ballot as Schwarzenegger has sought, the measures must be approved with two-thirds votes in both houses of the Legislature, which would require that some Republicans join the Democratic majority.

Sen. Don Perata (D-Oakland) questioned whether Schwarzenegger could persuade fellow Republicans to embrace the package. “Given the elements in this particular compromise, I think he’s going to have to sell that thing and sell it hard to all the Republicans in the caucus,” Perata said. “And I hope that’s where he’s centering his attention now.”

Assemblyman Rick Keene (R-Chico), vice chairman of the Assembly Budget Committee, said he had not been briefed on the deal by early Wednesday evening, when Democrats were already celebrating a victory.

“We’re waiting for real information on it,” he said. “My view is, if it doesn’t have a spending limit in it, our work is not done.”

Sharp Shift in Strategy

Schwarzenegger’s crafting of the deal without Republicans in the room represented a major departure in strategy from only days ago. One Republican lawmaker who spoke on the condition that he not be identified said the governor appeared to be responding to public pressure for bipartisan action by leaving Republicans out of negotiations and would now probably try to pick off a few GOP votes to pass the plan.

Though the tentative deal is a first test of the Republican governor’s campaign vow to end politics as usual and work with the Democrats who dominate the Legislature, it will not end his budget troubles. Even if the measures reach the ballot and are passed by voters, Schwarzenegger faces a $14-billion budget deficit next year and increasing resistance to his efforts to curb state spending.

Because the state has shorted payments to local government this week “we are a Band-Aid and piece of Scotch tape away from totally shutting down programs,” said Paul Stein, president of the California State Assn. of Counties.

Schwarzenegger spokesman Rob Stutzman took issue with the suggestion that the governor had not presented a plan for freeing money to make those payments.

He said that the governor had proposed cutting $1.9 billion from the current budget but that lawmakers were resisting.

Time is slipping away to put the bond and spending cap items on the March ballot, as Schwarzenegger has vowed to do.

Secretary of State Kevin Shelley originally told lawmakers that action by last Friday was necessary for him to get election materials to printers in time. Lawmakers debated the budget Friday until shortly before midnight, but failed to pass either Schwarzenegger’s proposal or a Democratic alternative.

Talks revived Monday after 19 lawmakers from both parties asked Shelley for more time, and he agreed.

Sen. Gloria Romero (D-Los Angeles) called it a “good possibility” that both houses of the Legislature would pass the latest proposal.

“The concepts are there,” she said. “But the devil is in the details.... We are waiting to see the language.”

The agreement would bar the state from borrowing to balance the budget, once the $15-billion bond issue was secured.

The constitutional provision that requires the governor to present a balanced budget to the Legislature would be changed to also mandate that the budget passed by lawmakers be balanced.

Lawmakers said they were still negotiating how to determine revenue for the coming fiscal year, which begins July 1.

There is discussion about putting together a bipartisan “forecasting conference” of state financial officials to do so. If the final deal truly restricts lawmakers from spending any more than the state is projected to bring in next year, they could be forced to find as much as $14 billion in cuts or new taxes for the 2004-05 budget.

A “rainy day” reserve is a key element of the agreement. Beginning in 2006, the state would begin transferring 1% of revenue into a reserve.

By 2008, that would grow to 3% a year and then would stay at that level. Half of the money from the reserve could be used each year to pay the bond issue off early.

The reserve would continue to grow until it amounted to one-tenth of the budget. At that point, lawmakers could at least temporarily stop putting money into it.

Fiscal Emergencies

Under the deal, the governor could declare a fiscal emergency if the budget fell out of balance during the year, but he would not be empowered to change laws to remedy that on his own -- a power that Schwarzenegger initially sought but Democrats said ignored the balance of power.

Instead, the agreement would require the Legislature to pass -- by a simple majority -- cuts to bring spending under control. Any remedy that included new taxes would require approval from two-thirds of lawmakers in both the Assembly and Senate.

Ackerman criticized the proposal for not having a hard spending cap and not including new authority for the governor to make midyear cuts.

“There is not much meat on those bones,” he said. “This is a balanced-budget approach which does not limit spending. All the proposals we have talked about have been caps.”

Ackerman also said the reserve requirement was weak.

But Wesson praised Schwarzenegger’s compromise.

“What the governor did was, he really governed,” he said.

The governor originally sought to cap expenditures at $72 billion next year -- a 16% cut from current levels of $86 billion -- and to allow spending to grow, based upon population and per capita income growth.

Democrats had sought to put spending at $83 billion next year and allow it to change thereafter, depending on the cost of living.

With its emphasis on building reserves and banning borrowing, the compromise resembles a constitutional amendment drafted by Assemblymen Joe Canciamilla (D-Pittsburg) and Keith Richman (R-Northridge). Ten other lawmakers, both Republicans and Democrats, endorsed that plan as co-authors, but it was defeated late Friday in the Assembly Elections, Redistricting and Constitutional Amendments Committee.

That plan would have banned borrowing to balance the state budget and prevented the Legislature from spending any more than 97% of revenue.

In the current agreement, the governor has abandoned the hard cap on spending that he initially pushed.

Critics charged that such a limit would ultimately force several programs to shrink dramatically, even if revenue surged. They said the hard cap would force public universities to turn away ever-growing numbers of qualified applicants, make it impossible for the state to keep pace with need in medical programs, and prevent California from ever again making the kind of investment in local schools that it has over the last decade.

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Times staff writer Peter Nicholas contributed to this report.