Fulfilling State Budget Pledge May Be Tough

After being swept into office on promises that he could cut taxes by billions of dollars without disrupting essential government services, Arnold Schwarzenegger now faces the extraordinarily difficult task of finding a way to do it.

Many budget makers are skeptical that the audit Schwarzenegger launched Thursday by handing the task to government finance expert Donna Arduin will find billions of dollars in waste as the governor-elect has suggested, or turn up the kinds of surprises he predicts will provide a guiding light toward fiscal health.

As Schwarzenegger inherits what he acknowledges could be as much as a $20-billion deficit, the only concrete budget action on his agenda is one that threatens to add to that deficit: rolling back a $4.2-billion increase in the state car tax.

Bond rating agencies already are warning of the problems a car tax cut could cause.

And fiscal experts in Sacramento are skeptical the new governor is going to achieve the kind of savings he has promised through other pillars of his “100-day plan,” such as renegotiating state agreements with Indian casinos and unions that represent government workers.

“The math is very tough,” said state Treasurer Phil Angelides, a likely Democratic contender for governor in 2006. “If he has a way to do it, if he can do it without taxes, he ought to lay it out,” Angelides said.

On Thursday, Schwarzenegger again resisted laying out anything more specific.

“There are a lot of things we don’t know,” he said at a news conference. “What we want to do is really get in and find out.”

Schwarzenegger refused to be specific even about where in the budget he wants the auditing team to look for overspending. He instead spoke generally about the process of crafting budgets being broken.

“They have spent too much money. They’ve seen the writing on the wall four years ago, that we are having a decline of business and revenues and all that,” he said.

“They kept spending, spending, spending.... We have to cut some spending.”

Members of Schwarzenegger’s economic advisory council were similarly nonspecific.

“He’s going to solve the budget problem by cutting spending and not by raising taxes,” said George P. Shultz, a former U.S. secretary of State and Treasury secretary who is now a fellow at Stanford’s conservative Hoover Institution.

“The whole tone in Sacramento is going to turn 180 degrees, from being anti-business to being pro-business.”

Cash Crunch Threatens

The new administration has little time to maneuver.

As the team races to get a budget together by the end of the year, there is a looming threat that the state could run out of cash because of problems in the current budget.

The bond rating agency Standard & Poor’s has advised investors that if the new governor rolls back the car tax, it could cause “a major loss of county discretionary revenues and possibly large cuts in social service spending, unless reimbursed by the state.”

Money from the car tax goes to city and county governments. If the tax is rolled back, other programs would have to be cut or about $4.2 billion would stop flowing to local police departments, fire stations and public health agencies.

The other option would be to keep sending the money to the locals, and just let the hole in the budget expand, which could damage the state’s already dismal credit rating even further.

“It creates an immediate problem if you take $4 billion out of the budget,” said J. Clark Kelso, director of the Department of General Services for the Davis administration, who spoke at a forum Thursday at which government officials and academics discussed transition issues.

Some Indian leaders, meanwhile, have already put the new governor on notice that they have little interest in sharing more of their gambling revenues with the state.

Mark Macarro, tribal chairman of the Pechanga Band of Luiseno Mission Indians, said that Indian tribes are not going to renegotiate compacts with the state until Schwarzenegger “apologizes to the tribal governments of California for attacking us in the campaign.

“He used us as ... red herrings to get voters distracted from the real issues,” Macarro said. “We are not part of California’s budget crisis, and we’re not going to stand by and take responsibility for it.”

Although a renegotiation might gain the tribe more lucrative slot machines in its casino, Macarro said: “We have 16 years left on our compact. Nothing can compel us to open that compact.”

Union Pacts an Issue

Schwarzenegger also has little leverage over government employee unions at a time when the state has just signed new contracts with them and is already laying off as many as 16,000 workers.

His team also will be grappling with how to deal with the $13 billion in borrowing in this year’s budget that has been thrown into doubt by lawsuits.

Former state Controller Kathleen Connell, a Democrat, said the state could face “a liquidity crisis in a couple of months” as result of those lawsuits.

“That is an immediate crisis this governor has,” she said. “The first function of this government is going to be to have cash to function.”

Schwarzenegger hinted Thursday that he might bring the borrowing before voters in March for their approval. The Pacific Legal Foundation, which is suing to stop the biggest bond sale, probably would withdraw its suit if voters signed off on the bond sales. But a vote would leave open the risk that the public could reject the bonds, which could in turn trigger a cash crisis.

“I think the people should make that decision, the bond issue and all that,” Schwarzenegger said. “I think we need to do it the right way, the legal way ... rather than brushing the debt under the rug and pretending we don’t have that debt.”

Members of Schwarzenegger’s team acknowledged that they face a tremendous task in cutting the budget.

One of the advisors, Julie Meier Wright, said the administration is aware that most of state spending outside education -- which Schwarzenegger has said is off-limits for reductions -- goes to health care and welfare programs that are difficult to cut because they touch the poor.

Wright, president of the San Diego Regional Economic Development Corp., said Schwarzenegger’s advisors want to get inside those programs and others that have seen rapid growth in the last five years.

“It’s a very hard job,” she said. “In the short term, we really need to know where that new spending came from and what aspects should be continued and what should not.”

Schwarzenegger, however, does have one advantage that none of his predecessors have had in the last 20 years. Language was written into the budget this year that gives the governor the authority to make midyear cuts in a wide range of programs if the state’s finances fall out of balance.

And he has one other thing, according to former state Treasurer Matt Fong: “He has a public persona that gives him power that very few people have.”

Times staff writers James F. Peltz and Doug Smith contributed to this report.