State Budget Briefing Is Grim

Gov.-elect Arnold Schwarzenegger got a grim briefing on California’s budget Thursday, and emerged appearing sobered and calling the state’s financial condition “disastrous.”

On his second day of meetings with state officials, the incoming governor met with state Treasurer Phil Angelides for a 35-minute morning tutorial. He said afterward that he was worried about the precarious status of billions of dollars worth of bonds used to balance this year’s budget. Angelides warned that the bonds are vulnerable to a legal challenge.

The governor-elect, whose usual ebullience was dampened after the meeting, said, “The problem was created over the last five years, and so you can’t expect that -- even though I’ve played very, very heroic characters in the movies, but you can’t expect me to walk into his office and all of a sudden come out with the answers.”

“It will take a while to resolve those problems,” he said. “They are very difficult problems, and we are really in a disastrous situation financially.”

Still, he insisted that the state would be able to balance its books without raising taxes, a pledge he made repeatedly in his campaign to unseat Gov. Gray Davis. “Oh yes, absolutely,” Schwarzenegger said.

Angelides was less optimistic.

“The math is very difficult to achieve,” he said after the governor-elect left his office. “I think it’s tough if you want to protect the essential investments in education that will make us a world-class economy. On the other hand, the governor-elect deserves a chance to lay out how he would approach these issues.”

Senate Republican Leader Jim Brulte, who played a major role in putting together the $13 billion in borrowing that helped balance the current year’s budget, called Angelides’ comments about the bonds alarmist. He said state attorneys and outside bond counsel are confident that the financing will survive legal challenges.

“If the treasurer had doubts ... he should have voiced them during the budget process,” Brulte said.

Schwarzenegger did not say how he planned to deal with the crisis. He avoided questions about whether he would push for a ballot measure asking voters to approve a new sale of bonds so the borrowing could withstand a court challenge.

He also did not say what, if anything, about Angelides’ presentation had surprised him.

As Schwarzenegger campaigned to unseat Davis this fall, state officials warned that California’s fiscal situation was worsening, and the GOP candidate himself acknowledged that the budget shortfall could reach $20 billion. Still, he projected a sunny optimism during the campaign that he would be able to resolve the budget crisis once he brought in experts to scour the books and curtail spending.

On Thursday, some Democratic lawmakers who had been alarmed by Schwarzenegger’s confidence on the campaign trail said they were relieved that he now appeared to grasp the dire nature of the state’s finances.

“To me, it’s a positive sign that he will come into a situation and say, ‘I didn’t realize,’ ” said Assemblyman Lloyd Levine (D-Van Nuys), a member of the Assembly Budget Committee.

“If you don’t have familiarity and experience to a certain degree on the state level on policy, you can be in for a significant surprise.... You just can’t come in, as he said in the campaign, ‘Open all the books, hold an audit, identify the waste and fraud’ ... and solve the problem.”

Assemblywoman Jenny Oropeza (D-Long Beach), chairwoman of the Assembly Budget Committee, said it was clear from Schwarzenegger’s campaign rhetoric that “he did not have a grasp of what the dynamics were.”

“I’m not surprised at his alarm,” she said, “because there are problems between what he has promised and what is realistic.”

Schwarzenegger’s grim assessment of California’s finances came as he spent another whirlwind day in the state capital visiting Democratic statewide officeholders. But the day was dominated by a lengthy meeting with Davis.

The two men spoke for an hour and a half, as Davis gave his successor a thick white binder labeled “Transition 2003” and walked him through the responsibilities of the office. They greeted each other cordially, although a bit uncomfortably, a sharp contrast to the bitter words both exchanged during the recall campaign.

During a 15-minute session open to a small pool of reporters, the incoming and outgoing governors sat in twin maroon leather chairs in a conference room, exchanging pleasantries. As Davis passed along tidbits of advice (His wife always told him: “Just enjoy every moment”), Schwarzenegger sat stiffly, nodding in response.

“That’s the table I was telling you about,” Davis said, pointing to the long glossy table that dominates the room used for Cabinet meetings.

“Oh yeah, that’s where all the big decisions are made,” Schwarzenegger responded.

Despite their awkward interaction, both men pledged to cooperate in the remaining weeks before Schwarzenegger takes office in mid-November to serve the remaining three years of what would have been Davis’ second term had he not been recalled by voters Oct. 7. The new governor is expected to be inaugurated Nov. 17, according to a senior member of his transition team.

“I have to say that my work in the future will be helped by Gov. Davis, because he’s going to show me the ropes,” Schwarzenegger said. “He’s going to give me some of the inside information, and he’s going to help me with the transition. And we’ve started a great relationship, and I’m really looking forward to working with the governor.”

Davis sounded wistful but resolute about his premature departure from office, saying he accepts the results of the election.

“I’m going to do my very best to help Gov.-elect Schwarzenegger be a success because I love this state,” he said, adding moments later: “Life is like a relay race; we each run our part of the race as well as we can, and then we pass the baton to the next person, which is what I’m doing in this transition.”

Schwarzenegger was more at ease an hour later when he emerged from Davis’ office, shaking the governor’s hand and pronouncing his predecessor “gracious.” He said Davis had gone over a series of issues with him, from the budget deficit to health care, and had given him a tour of the office and offered anecdotes from the Democrat’s tenure.

“It was a wonderful meeting, and he was very generous with his time,” Schwarzenegger said. “I wished that we would have met earlier.”

For his part, Davis released a statement calling his successor “charming and personable.”

The meeting between the two men drew intense attention, as a wall of more than 50 reporters and photographers blocked the corridor outside the governor’s office for two hours, waiting for a glimpse of them. A group of children on a school tour tried in vain to peer through the pack for a sight of Schwarzenegger. “Hey lady,” said one boy, tugging on the arm of a reporter. “Will you let him know there are school kids back here?”

But Schwarzenegger breezed through quickly, stopping for a quick photo with Davis before heading across the hall to meet with Lt. Gov. Cruz Bustamante, his onetime competitor in the race to replace the governor.

The governor-elect greeted the lieutenant governor warmly, reminding him of a joke Bustamante had made during the race that he resembled the character that actor Danny DeVito played with Schwarzenegger in the movie “Twins.”

“The comedy team, remember?” Schwarzenegger said, as he pumped Bustamante’s hand.

Once inside, the governor-elect told Bustamante that he wanted to work closely with him and planned to solicit his advice.

“He said, ‘The more candid, the better,’ ” Bustamante recounted later.

The lieutenant governor, who has been estranged from Davis for most of their tenure together, said he was hopeful that Schwarzenegger is sincere. He offered to work with the new governor to amend a new law that allows illegal immigrants to get driver’s licenses to ensure it contains adequate security measures.

Schwarzenegger, who has vowed to repeal the measure, did not commit to take him up on that help. But he did ask Bustamante to recommend representatives from the state’s various ethnic groups who could serve in his administration.

“If he wants to engage me, I’ll be very cooperative, I’ll be collaborative,” Bustamante said. “We won’t capitulate on our values and on the things I feel are important. But he seemed to be very open to a dialogue.”

Other Democratic state officials said they were equally impressed with the new governor’s eagerness to work with them, remarking on his willingness to meet with them in their offices.

“I think it’s a good gesture on his part,” said state Insurance Commissioner John Garamendi, who discussed workers’ compensation reform with Schwarzenegger.

Secretary of State Kevin Shelley said he had found Schwarzenegger “very engaging” as they chatted about their wives and the need to speed up corporate filings to ease an administrative chore required of businesses.

“I don’t think one can predict how the politics will work out,” Shelley said. “But I don’t think you can ever underestimate the value of personal relationships.”

The tenor seemed more serious during Schwarzenegger’s morning visit with Angelides, in which the treasurer emphasized what he had written in a letter to the new governor last week: that the state is at risk of running out of cash once again, thanks to legally dubious borrowing in this year’s budget.

If litigation over that $13 billion of borrowing ends up blocking or delaying it, the state would have no money to pay back other loans that come due in June, Angelides warned in the letter.

Angelides also told Schwarzenegger that the governor-elect’s pledge to immediately lower the car tax -- which would result in $4 billion less revenue a year for the state -- is adding to the jitters on Wall Street.

State Controller Steve Westly said he also had warned the Schwarzenegger about California’s tenuous position on Wall Street during their meeting Thursday afternoon. “I told him Wall Street is not partisan,” Westly said. “They are quickly reaching their limits of willingness to let us borrow. They want to see concrete proposals to put the budget back in balance.”