Revived Fiscal Plan Goes to Ballot

Gov. Arnold Schwarzenegger’s $15-billion budget plan headed for the March ballot Friday after an alliance with legislative Democrats allowed the governor to break a partisan deadlock and revive a proposal that had once appeared all but dead.

Schwarzenegger claimed victory late in the afternoon when the California Senate, by a one-vote margin, gave final approval for placing the plan before voters, with most Republicans opposed to its central element, a $15-billion bond to pay off current shortfalls.

“I am a happy governor because today is a new day for California,” Schwarzenegger said as he signed the bills. “There is now order in our fiscal house.”

Winning the Legislature’s approval for the bond was a major test for Schwarzenegger, who came to the job with no real political experience after voters ousted Gray Davis, a career politician, in an unprecedented recall.

The support Schwarzenegger received from Democrats bolstered the new governor’s claim that he would be able to break the partisanship that has bedeviled Sacramento for years.

He won praise from the Legislature’s most powerful Democrat. The budget deal was “about as good a bipartisan effort as I’ve seen since I’ve been around here all these years,” said Senate President Pro Tem John L. Burton (D-San Francisco).

The legislative compromise that Schwarzenegger brokered could begin to repair the state’s shaky finances, which have been followed closely in financial markets because of the state’s need to issue bonds to cover its budget shortfall.

Unlike the state Assembly, which had unanimously endorsed the package Thursday, the Senate’s assent came without a vote to spare. Senators were largely divided along party lines as they voted 27 to 12 to approve the bond measure, exactly the two-thirds majority needed in the 40-member chamber.

All of the Senate’s 25 Democrats backed Schwarzenegger’s plan, joined only by Senate Republican Leader Jim Brulte of Rancho Cucamonga and Richard Ackerman of Irvine, who is expected to replace Brulte as party leader next year. Twelve Republicans voted no, with one, Sen. William J. “Pete” Knight of Palmdale, abstaining.

Senators were more supportive of the companion measure, which would place a constitutional amendment on the ballot to make it easier for the governor to cut state spending in bad economic times and establish new spending restraints, including a reserve fund. That measure was approved 35 to 5, with all five votes against it coming from Republicans.

Neither measure will take effect unless voters approve both.

The victory marked a sharp turnaround from a week ago, when the new governor’s budget deal had a brush with death. After flinging threats of political retribution last week, the Republican governor and his aides struck up new talks primarily with Democratic legislators.

Secretary of State Kevin Shelley had declared that the deadline for approving the package was last Friday in order to place it on the March ballot. However, when lawmakers failed to reach a deal last week, the deadline proved malleable.

Schwarzenegger’s initial plan would have authorized up to $17 billion in debt, a sum that included payments to investment houses and others to prepare the bonds. The debt would have been repaid over as many as 30 years, at a cost with interest of more than $32 billion.

The compromise measure approved Friday would authorize the sale of $15 billion in deficit bonds to be repaid over about nine years, in part with money from a quarter percentage point of existing state sales taxes.

The spending-limit measure, while less strict than the governor had initially proposed, would require that the state have balanced budgets. It also would require that the state’s general fund carry an emergency reserve of 3% or $8 billion, whichever is greater. The proposal also would limit the power of the governor and Legislature to borrow to balance the budget, and would give the governor more power to call the Legislature back into session to impose cuts before future deficits balloon.

Suggesting the restrictions would impose tight controls on future legislators, Department of Finance spokesman H.D. Palmer said the measure would “prove to the people of California that Sacramento is finally dead serious” about budget reform.

“It has been impressive that he [Schwarzenegger] stuck to it,” said Democratic political consultant Kam Kuwata. “He brought people from both spectrums together. It is reflective of his dogged determination.”

But even as the Republican governor basked in the win, fellow Republicans continued sniping at the deal.

Democrats were largely silent during Friday’s debate in the Senate, giving over the floor to Republicans, who either were at most lukewarm in the praise of their governor’s proposals or highly critical.

“Sometimes you can’t take big leaps, but you can take solid steps forward,” Brulte said.

Critics, however, contend that the measure was loosely written and would lead to few notable changes. Although some language in the bill seems to restrict borrowing, the state could continue its practice of borrowing from special funds to keep government afloat, and could delay making payments, according to an Assembly Republican analysis. Additionally, lawmakers by a majority vote could use money in the emergency reserves to pay for general costs.

Sen. Tom McClintock (R-Thousand Oaks) warned that the proposal to alter the state constitutional debt clause, adopted in 1849, could “set in motion a spiral of spend, borrow and tax.”

The clause limits state debt to $300,000 without voter approval. Although courts have approved exceptions to the clause, McClintock said the clause has served the state well. “This is the first generation that has cast it aside,” he said.

Sen. Sam Aanestad (R-Grass Valley) ) called the bill “a sham” that was intended to “change the perception of the people of California” that lawmakers and the governor are gaining fiscal discipline.

Republicans who voted for the spending limit were less than enthusiastic.

“Who gets to decide whether the budget is balanced? It’s us,” said Sen. Jim Battin (R-La Quinta). He said the measure contained “huge loopholes” and predicted that future legislatures would find ways around its provisions. Still, he voted for the measure, saying it “does no harm.”

The measure would dust off two proposals made but never implemented by a constitutional revision commission in 1996, said Fred Silva, a former legislative budget writer now at the Public Policy Institute of California.

First, the state would be required to build its budget reserve of 3%. Second, the governor would be required to issue early warnings to the Legislature and the public when the state’s financial situation begins to deteriorate.

Silva noted that the spending limits would narrow a provision of the state Constitution known as the debt clause, but not dramatically. “This is a low-common-denominator solution,” Silva said. “He is taking little steps. These are baby steps.”

The measures will appear on a weighty ballot. The presidential primary is likely to draw heavy interest, particularly if the Democratic nomination remains undecided. Also on the ballot will be an initiative promoted by unions representing public schoolteachers and public employees that would lower the Legislature’s vote requirement to approve taxes to 55%.

“People want a solution” to the budget problems, said Democratic consultant Darry Sragow, noting that the campaign could be successful. “They want it fixed. One of the reasons we had a recall was that it wasn’t getting fixed.”

Although Schwarzenegger’s $15-billion bond measure has its critics, no group has emerged to mount a campaign. Treasurer Phil Angelides, one of the most vocal opponents of previous plans by Schwarzenegger, said Friday that he has not decided whether to mount a major effort.

“The [financial] markets hate uncertainty. This does introduce a degree of certainty,” said Robert E. Denham, former chairman of Salomon Inc., and one of Schwarzenegger’s advisors on the package.

Referring to the possibility that voters could reject the package, Denham added: “I don’t think anyone knows. That is a troubling answer.... It could be a pretty ugly funding picture.”