Governor’s Budget Bill Comes Due

After promising to fix the state’s financial mess without raising taxes, Gov. Arnold Schwarzenegger faces a reckoning this week with his release of a 2004-05 budget that attempts to close a multibillion-dollar shortfall through deep, politically divisive spending cuts.

Schwarzenegger will deliver his first State of the State address Tuesday in the Assembly chamber, where he is expected to champion job creation and economic development but also promote March ballot measures that would authorize $15 billion in borrowing while imposing a limit on future state spending.

Three days later, he will unveil his budget for the fiscal year that begins in July.

Until now, Schwarzenegger has largely put off questions about how he will square state spending with revenues and end the crippling budget deficits of recent years. At a news conference Dec. 18, he declined to say how he would reimburse cities and counties for the $4 billion they lost when he cut the vehicle license fee. “We will have plenty of time to talk about it,” he said.

That discussion starts this week.

So far, the governor’s office has released few details about the new budget. But the contours of Schwarzenegger’s plan emerged in interviews last week with administration officials and people close to the governor.

While fee increases are in, they’ve it made clear that a tax hike is out. And while signs of an economic recovery are encouraging, rising tax revenues alone won’t be enough to close a projected $14-billion shortfall in the next fiscal year, the governor’s aides say.

“Nobody should be lulled into a sense that we’re going to be able to grow out of this problem,” said H.D. Palmer, a spokesman for the governor’s finance department.

All of which leaves one remaining budget-balancing tool: spending cuts. Even Schwarzenegger has flinched at some of the reductions that he put forward to close this year’s budget gap, worrying that poor and sick Californians would be deprived of essential services. But there are few alternatives in the absence of a tax increase, financial experts say.

“I don’t believe you can bridge a gap of that magnitude without either a very substantial tax increase or making spending cuts that will have a very real impact on Californians’ lives,” said Jean Ross, executive director of the California Budget Project.

Serious though the problem may be, the numbers are not as worrisome as last year, when the state faced a $38-billion deficit under then-Gov. Gray Davis. Ultimately, the Legislature avoided dramatic spending reductions through heavy borrowing and reliance on increasing the vehicle license fee.

But Schwarzenegger must follow a tougher path. He is already proposing to borrow $15 billion -- most of it to cover past deficit spending -- which would leave a hole of about $10 billion in the 2004-05 budget. He made his challenge harder still when he rolled back the license fee.

A healthier economy and the prospect of more revenue from the federal government and from Indian casinos might pull in several billion dollars more. But that won’t close the gap. Schwarzenegger will be compelled to cut billions to bring the budget into balance.

The governor’s choices are limited. Because of voter-backed initiatives, constitutional mandates and contractual obligations, as much as three-fourths of the state’s $100-billion budget can’t be touched, Ross said. Within the narrow slice of the pie over which he has discretion, Schwarzenegger is expected to call on lawmakers to cut spending on state programs such as Medi-Cal and Healthy Families, along with prisons, colleges and universities.

“Virtually every aspect of state government is going to be asked to shoulder part of the savings and sacrifice to get our fiscal house in order,” Palmer said.

Healthy Families is a program that offers health care to children of the working poor. The joint federal-state program insures about 700,000 children, with an additional 300,000 eligible but not enrolled.

Palmer said the governor’s budget would limit access to Healthy Families, thereby controlling the caseload and slowing the growth in spending -- a plan that tracks the midyear budget reductions Schwarzenegger released in November.

As a candidate for governor, Schwarzenegger praised the program and did not want to oust those already enrolled in it, Palmer said. But the enrollment cap would deny coverage for new children until others leave.

Cuts to local governments are also expected. Schwarzenegger recently won widespread praise in cities and counties for promising to replace the lost license-fee money. But in a tight budget year, said one Schwarzenegger aide, “local governments are back on the block.”

The University of California and the California State University systems both face another round of cuts that could trigger an increase in fees and new limits on enrollment.

Prisons will also be targeted. The governor is considering early release of nonviolent inmates to save the $28,400 annual cost to house a prisoner.

And convinced it can wrest savings by eliminating fraud and abuse in state government, Schwarzenegger’s administration will attempt to flush out waste in the Medi-Cal program, which has been defrauded by tens of millions of dollars for such items as specialized wheelchairs and compression stockings, the governor’s aides said.

Schwarzenegger’s budget will prove the toughest test yet of his resolve to come to terms with the state’s financial crisis. His record to this point is uneven. Determined to plot a centrist course, the governor has recoiled at some of the cuts proposed by his own administration in a bid to align spending and revenue in this year’s budget.

Last month, for example, he reversed his initial plan to save about $274 million over 18 months in programs that serve the developmentally disabled. Demonstrators in wheelchairs massed at the Capitol to protest the cut. As an international representative of the Special Olympics -- and as the husband of Maria Shriver, who is playing an influential role in his young administration -- Schwarzenegger ultimately concluded that the cuts were not “consistent with my record as an advocate for the developmentally disabled.”

Some Democrats applauded the reversal, interpreting it as a sign that Schwarzenegger will resist the steeper cuts embraced by conservatives in the Legislature and his own administration.

“The governor has shown himself to be his own man, as he begins to learn the correlations between what he believes and what programs serve those beliefs,” said Sen. Don Perata (D-Oakland).

Barring a tax increase, Schwarzenegger will have no choice but to propose deep and broad-based spending cuts that may clash with his own values if he is committed to balancing the budget, lawmakers and financial experts said.

“Whatever decision he makes, it’s going to have a human impact,” said state Sen. Martha Escutia (D-Whittier). “He has to weigh what his bottom line is in terms of how much human pain to impose. And I don’t frankly see how he can get out of it -- whether it’s the developmentally disabled or poor children who need health care or middle-class children who want to go on to higher education. There’s going to be pain.”

If Schwarzenegger relents and raises taxes, he risks alienating his base of Republican voters. Some are already unnerved by a comment that signaled flexibility on the question. Were voters to show an appetite for new taxes, the governor said at a news conference, he would be inclined to listen.

“Every conservative advisor he has howled in protest when he made those comments, and he was chastened by that,” said Stephen Moore, head of a Washington, D.C., political group called Club for Growth and a Schwarzenegger appointee to a committee that reviewed California’s finances. “It was really a matter of him being a political newcomer and new to the game.

“I said to Donna [Arduin, the governor’s finance director], ‘Even if you actually thought that maybe we could raise taxes in a year or two, you wouldn’t want to say that now because it weakens your bargaining position.’ It was tactically and politically a blunder.”

Perata said he believes a tax hike is necessary. At a meeting with Schwarzenegger, Perata said, he gave the new governor a copy of “The Sopranos Family Cookbook” as a gift. But he said he wishes he instead gave him longtime journalist Lou Cannon’s recent biography of Ronald Reagan, which describes how the Republican raised taxes in his first year as governor of California in 1967.

“He ought to be taking a page out of Ronald Reagan’s playbook,” Perata said, “because faced with the same kind of inherited problem

But Schwarzenegger’s budget will contain certain fee increases that will boost the cost of visiting and camping at state parks as well as the cost of hunting and fishing licenses.

For Schwarzenegger, the week is shaping up to be typically frenetic. So far he has notched some notable political victories: scaling back the car registration fee and repealing a law that would have allowed illegal immigrants to obtain driver’s licenses; putting the $15-billion bond and spending limit on the March ballot; and coming up with a plan to replace the license-fee money that local governments stand to lose.

Advisors say Schwarzenegger’s focus will narrow over the next two months as he campaigns for passage of his bond measure and spending limit.

Busy as they were, the last six weeks were largely a prelude to what happens this week: the release of Schwarzenegger’s first budget, lawmakers said.

“Spring training is over,” said Perata. “Now the season starts.”