Gov.’s Wins Leave Deficit on Hold

Arnold Schwarzenegger wins.

Victory has been a constant in the life of the bodybuilder-turned-actor-turned-politician. And it has been the political story of his first month as California governor. Schwarzenegger has shown a knack for fashioning political triumphs: repealing a tripling of the car tax, rescinding a law granting driver’s licenses to illegal immigrants, making a deal with Democrats on a deficit bond and balanced budget constitutional amendment, and deftly going around the Legislature to provide money to local governments.

But as the governor wowed even his critics with this winning streak, the state he leads racked up losses. Two bond agencies downgraded the state’s creditworthiness, pushing the rating on nearly $30 billion in general obligation bonds closer to junk status. Schwarzenegger’s repeal of the car tax boosted next year’s structural deficit -- the gap between anticipated revenue and promised spending -- from $10 billion to an estimated $15 billion. And his guarantee of money for local governments has increased the financial pressure on the state’s other programs and agencies.

Those two forces -- the governor’s appetite for victory and the state’s seemingly intractable problems -- have thus far been on separate tracks. Schwarzenegger’s political victories have largely been made possible by delaying any financial reckoning.

But in January, after he returns from a brief Christmas vacation at his home in Sun Valley, Idaho, the governor will have to introduce a budget and test whether his winner’s touch can really conquer the state’s deficit.

“I don’t think, systemically, anything has been made better,” said Assemblyman Joe Canciamilla (D-Pittsburg), a centrist who was a Schwarzenegger ally in the push for a deal on the balanced-budget amendment and deficit bond.

Assessing the governor’s actions since Schwarzenegger was sworn in on Nov. 17, Canciamilla added: “We’ve done some things that, on the surface, have made things somewhat better,” but “we’ve got to resolve the fact that we’re spending $8 billion to $10 billion more than we take in. We’ve got to fix that.”

Political observers acknowledged that Schwarzenegger’s victories have been dramatic. In that respect, they confirmed the strategy of the governor and his team of political consultants that Schwarzenegger should always be seen as driving events and that he should govern in “big moves.”

In repealing the vehicle license fee increase, Schwarzenegger dramatically walked from his swearing-in directly to his Capitol office to sign an executive order. A week later, the governor won an overwhelming vote to repeal a law that would have provided driver’s licenses for illegal immigrants; the law had been passed by the same Legislature earlier in the fall.

His two most recent actions allowed aides to portray the governor as snatching victory from the jaws of defeat.

After the Legislature voted down his plan for a spending limit and a $15-billion deficit bond on Dec. 5, Schwarzenegger -- with prodding from his wife and centrist lawmakers -- revived the plan in around-the-clock negotiations. The effort ended in a deal that was hailed for its bipartisanship, though Republican lawmakers were left out of the negotiations, and some declared it a defeat in disguise.

Last week, Schwarzenegger faced withering criticism from local officials across the state for not replacing funds that had been taken away when he repealed the car tax increase; legislators wouldn’t approve the money without the governor’s identifying unpopular cuts. But aides in the Department of Finance found a way for the governor to provide $2.65 billion to local governments without the Legislature’s approval.

The dramatic announcement of the governor’s executive order transformed critics like Los Angeles Mayor James K. Hahn into enthusiastic fans of the governor. Pundits marveled at the political turnaround.

Government scholar Jack Pitney of Claremont McKenna College compared Schwarzenegger with former President Reagan for the new governor’s ability to “pull a rabbit out of a hat,” and even with ex-President Lyndon B. Johnson for skillful “procedural maneuvering.”

Through his political victories, “Schwarzenegger has built a storehouse of political capital that will be of great use to him as he deals with the budget fight,” said GOP strategist Dan Schnur, who does not work for the governor. “By repealing the driver’s license, rebating the car tax and bailing out local governments, he’s building a reservoir of political support that he’s going to need, come January.”

But, while the political triumphs give Schwarzenegger a cushion, they also have a cost.

Both Fitch Ratings and Moody’s Investors Service, which advise investors on the quality of bonds, have downgraded the state’s credit in recent weeks. Both ratings services said that, even with a new governor, the state has no plan for dealing with its structural problems. And they noted that Schwarzenegger’s rollback of the car tax increase had worsened the state’s deficit.

The downgrades left California just above junk bond status with all three of the major bond-rating houses. That fact has immediate costs. The state is now obligated to pay $55 million in penalties to its lenders.

“It’s pretty much the same,” said Moody’s analyst Timothy Blake of the new governor’s effect on the state’s fiscal problems. “I still don’t think they have a way out of the financial crisis.”

Jean Ross, director of the California Budget Project, a nonprofit that studies the budget, noted that Schwarzenegger’s deficit borrowing plan means that the state, instead of borrowing $10 billion to be paid back over five years as Gov. Gray Davis planned, could borrow $15 billion over as many as 13 years -- if voters approve the borrowing on the March ballot.

“The fundamentals have moved in the wrong direction” since Schwarzenegger took office, Ross said.

Ross and other budget experts said that Schwarzenegger’s triumph in going around the Legislature -- particularly in giving money this week to local governments -- also poses a problem in dealing with the state’s deficit. The bond-rating agencies have reacted negatively to signs of partisanship in Sacramento, with Moody’s basing California’s low rating in part on “the continuing inability to reach political consensus on solutions to its budget and financial problems.”

And by guaranteeing money to local governments, Schwarzenegger has removed mayors and county supervisors -- generally a force for compromise in Sacramento -- from the budget debate. “Cities and counties are one of the few entities that cross the partisan lines here,” said Assemblyman Darrell Steinberg, D-Sacramento.

Larry Gerston, a political science professor at San Jose State, said the governor’s move to provide money to cities had been “choreographed beautifully.” But having given money to the mayors to replace car tax funds, Schwarzenegger may ultimately be forced to cut social programs that also provide critical funds for cities and counties.

“The victory is not one-sided,” Gerston said. The mayors who praised Schwarzenegger’s actions “won, but those guys will lose, too.”

Schwarzenegger’s string of political wins also may harm him in a more fundamental way, said Martin Kaplan, director of the University of Southern California’s Norman Lear Center, which studies the intersection of politics and entertainment.

News of the governor’s triumphs has been broadcast so widely that many voters may believe the state’s structural problems have been fixed. That raises unreasonable public expectations for the governor, Kaplan said, just as Schwarzenegger prepares to make unpopular budget cuts.

“The recent news has cast him as such a victor that many people may think the problems are now solved,” Kaplan said. “A lot of people will be surprised and feel a bit ambushed when next year arrives and the budget debate gets going.”

If that happens, the governor ultimately could lose -- by winning.

Times staff writers Jeffrey L. Rabin and Evan Halper contributed to this report.