Cuts in State Budget on the Table, Sources Say

Aides to Gov.-elect Arnold Schwarzenegger presented him with a series of budget-balancing choices this week that included cuts in higher education and mental health programs, according to informed sources who spoke on the condition that they not be identified.

The proposals came during five hours of confidential meetings with Schwarzenegger’s top fiscal advisors Wednesday, after which the group adjourned with no consensus on how best to begin cutting services to attack the state’s multibillion-dollar deficit.

Incoming Finance Director Donna Arduin suggested the cuts in education and health. The proposals came from the Finance Department’s staff members, who had worked through the weekend, combing the budget for places to trim.

Schwarzenegger assumes office Monday and is expected to present budget proposals the next day to a special session of the Legislature. Among them are likely to be a bond that would pay off the state’s past short-term debt and an annual cap to keep lawmakers in the future from spending more than the state receives in revenue.

For Schwarzenegger, sources said, the closed-door sessions became another lesson in just how limited his options will be in addressing the budget crisis if he is to keep his campaign promises to repeal a recent tripling of the state vehicle license fee, avoid tax increases and still not disturb education programs long championed by the governor-elect.

The sessions took place only hours after another private meeting in which about a dozen economists told Arduin that California’s gradually recovering economy is unlikely to grow quickly enough over the next 18 months to dig the state out of its continuing fiscal crisis.

“It’s not enough to solve the problem by any measure,” said one meeting participant.

Short of spending cuts or tax increases, the growing consensus among budget experts in the Capitol is that Schwarzenegger’s only way out will be to ask state lawmakers to place a deficit bond proposal of $20 billion or more on the March ballot, coupled with a constitutional spending cap to solve the structural imbalance between spending and tax collections.

Schwarzenegger spokesman H.D. Palmer confirmed the Wednesday meetings with the new governor and his fiscal staff in Sacramento, but declined to say what specifics had been discussed.

“It’s very focused, very detailed, very thorough discussions about aspects of the state budget and the state fiscal problem,” Palmer said, adding that Schwarzenegger also has met with fiscal advisors in Southern California.

“In terms of having something locked down and ready to go, we are not there yet,” he said.

According to sources close to the new administration, Schwarzenegger has been drafting a plan for a mega-bond, and will pitch it to the public as a means of cleaning up the deficit left behind by the administration of Gov. Gray Davis. Both the bond and the spending cap proposal would need to be approved by the Legislature by Dec. 5 to appear on the March ballot. But additional budget cuts would be needed to keep spending under control until a cap was approved by voters and initiated.

Wall Street bankers, who have been approached for help with the potential $20 billion borrowing, say officials with the new administration call it the “burrito bond” because it would wrap up several of the state’s financial obligations into one package.

Among those obligations are billions in legally dubious borrowing that was supposed to be used to balance this year’s budget but has been held up in court, payments to local government now coming from the $4-billion car tax hike that Schwarzenegger has promised to rescind and part of the projected $10-billion deficit for the coming fiscal year.

“Until the new governor comes up with a proposal to wipe out the structural deficit, all this talk about bonding and going forward is moot,” said Irwin Nowick, a senior policy advisor to several Assembly Democrats and a few Republicans.

The state’s two top fiscal officials -- Treasurer Phil Angelides and Controller Steve Westly, both Democrats -- have come out strongly against submitting a large deficit-bond issue to voters without a concrete plan to bring spending under control first.

Democrats and Republicans in the Legislature appear to be taking a wait-and-see approach. Such a bond issue would allow them to avoid cutting some health and social service programs, but it also would saddle taxpayers with a 30-year bill. The borrowing costs on a $20-billion bond issue over that period could be another $20 billion.

“It’s a very difficult situation with no easy answers,” said Assemblyman Keith Richman (R-Northridge), who worked on a bipartisan plan for balancing the budget last year. Richman said he and Assemblyman Joe Canciamilla (D-Pittsburg) could not find a reasonable budget solution that didn’t include at least a modest tax hike.

Even after bringing spending down to levels below those of 1998, Richman said, “we were not able to balance the budget without a temporary sales tax to pay off the accumulated debt.” Richman was the only Republican during the budget debate last summer to support a tax hike.

Even without a tax increase, he said, “the spending reductions we proposed were not acceptable to most of the Legislature on both sides of the aisle.”

Nor were they popular with the public, according to opinion polls.

A spending cap would shrink the size of state government over time. But there is debate in Sacramento over how to make one effective.

Business groups have been unimpressed by some of the proposals put forward by advisors to the governor-elect, because they would allow spending to grow exponentially in boom years when personal income tax receipts were strong.

Some budget experts say that creating a truly effective spending cap would require tinkering with Proposition 98, which guarantees that a certain percentage of state revenue always be devoted to education -- already the largest portion of the budget.

Revising that constitutional guarantee would be unpopular with voters, but creating an effective spending cap otherwise would lead to reductions that could decimate social service programs embraced by the Legislature’s Democratic majority.

Richman and Canciamilla are working on a cap proposal that they will present when the Legislature convenes Tuesday.

More pressure will be placed on Schwarzenegger today, when Legislative Analyst Elizabeth Hill is scheduled to reveal her latest estimate of the size of the budget problem.

It was Hill who warned shortly after last November’s election that the gap between what the state spends and what it takes in had grown to record levels. Only a few weeks later, Davis announced that the budget deficit had ballooned to $34.8 billion, fanning the flames of the recall campaign that ultimately cost the veteran Democratic officeholder his job.