Cities, Counties Regain Billions; Gov.’s Aide to Cut Education

Gov. Arnold Schwarzenegger on Thursday went around the Legislature by issuing an executive order authorizing the restoration of billions of dollars that local governments lost when he cut the vehicle license fee last month.

At a news conference where he was flanked by dozens of enthusiastic local government officials, the governor announced that he was invoking an obscure budget law to make the payments directly out of state coffers without legislative consent. And he criticized lawmakers for recessing for the holidays without taking action to restore the payments.

“Even though time is running out for local governments and they are stranded with no money, our Legislature has left town,” he said. Since the legislative leadership had not acted, he said, “I am acting without them.”

The governor also announced that his finance director, Donna Arduin, would use expanded power given to her in this year’s budget to make $150 million in cuts to higher education and other programs on her own authority.

Those cuts will not go far toward offsetting the $2.65 billion in car tax revenue that cities and counties counted on for public safety and other programs until Schwarzenegger rolled back a fee increase enacted by former Gov. Gray Davis.

But the governor proposed that the sum be made up by combining some of the $1.9 billion in midyear cuts that he had already requested with a windfall of $1.8 billion in accounting changes and projected revenue that the state expects to receive by June as a result of improvement in the economy.

The proposed cuts face resistance, however, within the Legislature, which is dominated by Democrats. And even if Democrats were to vote for them, they would do little to help Schwarzenegger resolve a projected deficit for next year that will grow from $10 billion to $14 billion as a result of the continuing car tax loss.

While Schwarzenegger portrayed his action as another sign that he was restoring fiscal responsibility to state government, the state’s credit standing suffered yet another major downgrade Thursday.

Fitch Ratings, which advises investors on public and private financing issues, downgraded the state’s credit three notches to BBB.

The move now puts California just above junk bond status with all three of the major bond-rating houses.

Earlier downgrades by Standard & Poor’s and Moody’s Investors Service added $55 million to the price of short-term loans that the state has secured to remain solvent through June, officials said.

Democrats quickly warned that the governor’s action -- called a deficiency request in legislative parlance -- may be illegal, and that it is irresponsible of him to order the payments without a plan to bring the budget into balance.

“Is it an appropriate issue for a ‘deficiency’? People really doubt that,” said Senate President Pro Tem John L. Burton (D-San Francisco).

Burton suggested that lawmakers might call officials from every city and county to testify before the Legislature about why they are in dire need of the funds.

“The question would be, if it’s a deficiency, the Legislature still has to vote on it, which means they still have to come to us and they will explain each and every locale that’s in peril if they want to get this money,” he said.

Schwarzenegger said lawmakers had left him with no choice but to make the move. He argued that the car tax hike enacted in October had to be reversed because it was illegal, and local governments should not suffer because of that.

To authorize the restoration payments, the governor invoked a provision of budget law that allows him to order emergency appropriation for cost overruns in critical government services.

Past governors have generally reserved that approach for unanticipated growth in the prison population or health-care rolls.

But Schwarzenegger argued the $2.65 billion that local governments stand to lose this year as a result of his car tax cut also constitutes an emergency that must be dealt with immediately.

State Treasurer Phil Angelides, a Democrat, called the governor irresponsible for obligating the state for billions of dollars more in payments without a plan for balancing the budget.

“To say I’m going to take $2.7 billion in a state that is already $14 billion underwater is disingenuous,” Angelides said. “The money will come from somewhere. He just isn’t telling the people where it is going to come from.”

The governor refused to discuss how he would deal with the rest of the deficit.

“This is really not a press conference about my budget,” he said. “The budget will come out Jan. 10 and we will have plenty of time to talk about it and argue with legislators.”

The governor is constitutionally required to present the next year’s budget by Jan. 10.

Through the day, Democrats endeavored to understand the legal implications of the governor’s move. Some argued that he does not have the authority to appropriate money without them.

Schwarzenegger said he was on firm legal ground.

He said administration lawyers and the controller’s lawyers had looked at the law “and it was very clear I have the power to do that.”

The governor was indeed given a boost by state Controller Steve Westly, a Democrat, who broke with party ranks to support the payments. Only days ago, officials in Westly’s office said Schwarzenegger could not make the payments by executive order.

But soon after administration officials shared their plan with the media on Wednesday evening, Westly’s office announced its support.

The controller was the lone Democratic state official to stand with the governor at the news conference.

“The Legislature has given the governor the legal authority to do this, and my office will issue the payments,” he said.

Local officials applauded Schwarzenegger’s move. Los Angeles Mayor James K. Hahn, who had harsh words for the governor over the potential loss of car tax payments only a week ago, praised the governor.

“We haven’t seen this kind of bold leadership in Sacramento for a long, long time,” he said.

Oakland Mayor Jerry Brown, a former Democratic governor, also lavished praise upon Schwarzenegger.

The $150 million in cuts that Schwarzenegger announced will affect a wide range of programs, from social services to higher education.

California State University officials said Thursday that they would reduce enrollment during the coming year by 4,000 students as a result of $23.7 million in midyear spending cuts announced by Schwarzenegger.

The retrenchment will cut enrollment from 409,000 to about 405,000 students. CSU officials said that they would begin the cutbacks immediately and that most of the system’s 23 campuses are likely to shut off new admissions for the spring term. University of California programs will be cut by $29.9 million, including a reduction of $12.2 million for outreach efforts.

At the same time, Schwarzenegger reversed himself on cuts to the developmentally disabled that his administration had earlier proposed -- and which brought thousands of protesters to the Capitol. The governor called that proposal “a mistake on my part.”

*

Times staff writer Carl Ingram contributed to this report.