Schwarzenegger Unveils Budget

Times Staff Writers

A new state budget proposed Friday would lop billions of dollars from social services and higher education while depending on billions in revenue that may not materialize and borrowing that Gov. Arnold Schwarzenegger had promised to avoid.

The governor’s $99-billion budget avoids new taxes but attempts to close an estimated $14-billion shortfall by boosting fees at colleges and universities, limiting enrollment in health programs that serve poor Californians, paring welfare benefits and diverting some of the state property tax revenue that now goes to cities and counties.

“In the last two budgets, the easy choices were made,” Schwarzenegger said at a news conference held in a downtown auditorium because the Capitol pressroom could not accommodate the overflow of journalists from around the world.

In a reference to his predecessor, former Gov. Gray Davis, Schwarzenegger said: “Those budgets were shell games, using tricks and gimmicks to put off the hard decisions until after the next election cycle.”


Yet Schwarzenegger’s spending plan employs some of the same methods that he maligned. His budget for the fiscal year starting July 1 includes more than $3 billion in reductions that hinge on events largely beyond the control of the governor and Legislature, such as court appeals and economic trends.

In all, about half of the shortfall for next fiscal year would be eliminated by borrowing and accounting maneuvers similar to those he has criticized in the past.

The plan relies heavily on negotiations that have yet to begin with Indian tribes that operate casinos and with state workers, from whom the governor wants to wrest salary and benefit concessions. And it assumes that major savings will occur by reducing the rate paid to doctors who treat Medi-Cal patients and borrowing to cover pension fund payments -- actions that judges have already signaled may violate federal or state law.The governor said the cuts would be painful but temporary and blamed them on the “mess” he inherited.

The budget would result in tens of thousands of low-income Californians losing access to medical care through $2.7 billion in social service program reductions.

A $729-million cut to higher education would raise tuition 40% for students enrolled in university graduate programs. Other cuts would lead to an even bigger percentage increase in the cost of attending community college.

Local governments would lose $1.3 billion under Schwarzenegger’s plan to divert property tax receipts to the state -- a maneuver that stirred outrage among some of the same mayors and city officials who had heaped praise on the governor just last month for making good on a commitment to replace $4 billion in lost vehicle licensing fee revenue. That loss occurred when Schwarzenegger made good on a campaign promise to roll back the car tax increase that Davis used to help balance the previous budget.

“This budget will make reductions,” said the governor, who used oversized charts and a PowerPoint slide show to punctuate his half-hour address. “As I said in my State of the State address, if we do not control the spending today, we will put every program at risk tomorrow and California will be bankrupt. And a bankrupt California will not be able to provide services for anyone.”

Schwarzenegger emphasized that he views the reductions in programs as temporary. “We have to cut back for the next two years until we get out of this crisis,” he said. “It’s that simple.”


That sentiment positions the governor politically between the Legislature’s Democratic leaders, who oppose most social service cuts, and more conservative legislative Republicans who have repeatedly said they would like to see the current financial crunch lead to a permanent reduction in the size of state government.

The annual release of the budget is the first step in a lengthy negotiation process with state lawmakers that promises to spill into summer as officials struggle to close what Schwarzenegger said is a projected $14-billion shortfall. (In his State of the State address earlier in the week, the governor estimated the gap at $15 billion.) Because of the state constitutional requirement that budgets pass by at least a two-thirds majority, Democrats, who control both houses of the Legislature, will have a powerful voice in shaping the final package.

Democrats were measured in their reaction Friday, saying they wanted to carefully review the cuts proposed in a broad swath of programs.

“They certainly managed to put an undue burden on the poor,” said Senate President Pro Tem John Burton (D-San Francisco). “Those who can least afford it are asked to pay the most."Republicans, business groups, and conservative taxpayer organizations, meanwhile, praised the Schwarzenegger plan.


“The governor’s budget proposal is an excellent approach to solving years of fiscal mismanagement,” said Senate Budget Committee Vice Chairman Richard Ackerman (R-Irvine).

In line with a campaign promise, Schwarzenegger avoids tax increases in his first budget, which comes less than two months after his inauguration. He relies instead on program cuts, borrowing and the deferral of some costs until next year. The budget does not come to terms with a fundamental imbalance between what the state spends and what it collects in revenues. And so the state could face a shortfall of $3 billion to $7 billion in 2005-06 without more enduring solutions.

Overall, the level of spending on most programs in the 2004-05 fiscal year would be somewhat higher than in the current fiscal year. But the increases would not keep up with the state’s population growth or inflation. Democrats and social service providers say that means programs must be cut; Republicans prefer to talk about reductions in the rate of growth.

The budget assumes that economic growth would boost overall revenue next year by about $2.9 billion.


The governor’s plan counts on voters approving a $15-billion bond on the March ballot. Schwarzenegger’s own public opinion polls show the bond will be a tough sell. He used the news conference Friday to press his case for the bond measure, pointing to charts showing that spending cuts would be drastically more severe if it did not pass.

“And if this bond does not pass in March, we will be forced to make painful cuts to essential programs. We cannot let that happen,” the governor said.

Having promised to limit state spending, Schwarzenegger has portrayed the balanced budget measure also on the March ballot as tantamount to tearing up the state “credit card,” preventing California from borrowing to close budget shortfalls.

Yet his budget proposes to borrow $950 million to cover payments owed to the state’s pension fund for government employees.


Late last year, a judge in Sacramento ruled a similar maneuver by the Davis administration to be illegal. That ruling is under appeal.

“He must have gotten another one [a credit card] in the mail and decided to start using it,” state Treasurer Phil Angelides said in an interview. Angelides, a Democrat, said Schwarzenegger’s pension borrowing plan is “particularly interesting in light of the fact that the court rejected last year’s attempt.”

Asked about the new pension bond proposal, Finance Director Donna Arduin said the borrowing plan is acceptable because it would cover a payment the state is obligated to make -- not to close a shortfall. Her rationale could open the door to billions more in borrowing.

“This budget is as stable as a sand castle on the San Andreas fault,” said Angelides, who has emerged as one of the governor’s most vocal political foes. “The promises to stop the ‘crazy deficit spending’ have been left in tatters.”


The governor assumes he can save nearly $1 billion with the kind of cuts to the Medi-Cal program that a judge last month ruled illegal because they conflict with federal Medicaid regulations. The proposal would reduce the rate paid to doctors in the program by 10% on top of a 5% cut in the current budget.

That 5% reduction was blocked by the court on Christmas Eve in a ruling that left no room for further reductions.

Arduin said the administration intends to appeal that decision.

Other savings rely on much the same sort of speculative assumptions made in the final budget of Davis’ tenure. Schwarzenegger’s budget, for example, sets aside $500 million in new revenue from Indian casinos. That is based on the hope that the governor can extract more money from tribal gambling operations through negotiations.


Tribes are under no obligation to renegotiate their compacts with the state and so far have shown little interest in doing so.

The budget assumes $438 million can be saved by the Department of Corrections without any early release of prisoners, but offers few details. The budget also assumes $350 million in additional help from the federal government, which state Controller Steve Westly describes as dubious.

“Hoping for the best tomorrow doesn’t solve today’s problems,” he said.

The overhaul of state government that Schwarzenegger promised during his campaign was largely missing from his budget. The plan alludes to many ways in which the state could save money by restructuring programs, but notes that reform proposals are in their infancy and would not yield appreciable savings for the state until 2005-06.


“A number of these reforms are being worked out,” Arduin said following the governor’s address.

In an interview later, she added, “Since the agency heads are fairly new and we haven’t had time to work with the beneficiaries of these programs, we decided not to dot every i and cross every t.”




At a glance

Much of the cutting in Gov. Arnold Schwarzenegger’s proposed budget for 2004-05 is merely a reduction of projected spending growth. Despite the cuts, actual spending would still increase for K-12 and community college education, and health and human services, which together account for more than 70% of the general fund. Higher education, transportation and some other government services would receive less than in the current year.

(In millions of dollars)

*--* Percent Program ’03-04 ’04-05 change K-14 education $31,418 $33,152 6% Health & human services $22,789 $24,600 8% Higher education $6,352 $6,058 -5% Youth and adult corrections $5,326 $5,732 8% Legislative, judicial executive $2,528 $2,616 3% General government $1,212 $1,105 -9% Resources $985 $939 -5% State and consumer services $471 $478 1% Business, transportation and housing $518 $375 -28% Labor and workforce development $113 $86 -24% Environmental protection $91 $70 -23%



Key components

These are the major elements of Gov. Arnold Schwarzenegger’s proposal to close a projected gap of about $14 billion in next year’s general fund budget.

Spending cuts: $6.8 billion


* $2.7 billion in health and welfare, including Medi-Cal provider cuts and capped enrollment in health care for the poor

* $2 billion reduction in Proposition 98 guarantees to K-14 public education

* $1 billion from transportation projects funded by Prop. 42’s sales tax on gasoline

* $729 million from higher education to be partially offset by income from higher student fees


* $438 million from adult and youth corrections

Borrowing: $4 billion

* $3 billion from the $15-billion economic recovery bond issue that the Legislature placed on the March ballot

* $950 million from pension obligation bonds similar to ones a Sacramento Superior Court ruled unconstitutional last year


Tax shifts: $1.3 billion

* $1.3 billion diverted from local property taxes of cities, counties, schools and special districts

Fee increases: $238 million

* $22 million from state-funded child care programs


* $109 million from University of California students (increases of 10% for undergraduates, 40% for graduates and 20% for out-of-state)

* $78 million from California State University students (hikes of 10% for undergraduates, 40% for graduates and 20% for out-of-state)

* $18 million in park fees

* $11 million other, including community care licensing, air resources and board of corrections fees


Revenue and spending plan

The governor’s $99-billion budget includes about $79 billion in discretionary revenues in the general fund. The charts show the projected sources of that money and how the governor proposes spending it.

*--* Revenue source Percent of total Personal income tax 49.80% Sales tax 32.70% Corporation taxes 10.00% Insurance tax 2.70% Liquor tax 0.40% Tobacco taxes 0.20% Estate taxes 0.20% Other 4.00%



*--* General fund expenditures Percent of total Education K-12 39.90% Health and human services 32.30% Higher education 11.40% Youth and adult corrections 7.50% Tax relief 6.20% Courts 2.10% Resources 1.20% State and consumer services 0.60% Business, transportation and housing 0.50% Environmental protection 0.10% Other -1.80%


Source: Governor’s budget



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Reality check

Gov. Arnold Schwarzenegger made several general assertions about California’s fiscal health and the cause of the current budget crisis. Some of his statements simplified or did not fully describe the reality. Here’s how Schwarzenegger’s press conference remarks Friday compare with what his 2004-05 budget and previous state budgets show.



Children’s health insurance

Schwarzenegger: “I’m very happy to say that 20,000 or more children will be able to join the program, the Healthy Families program, every year.”

Budget: The governor’s office later corrected this statement, saying 20,000 children a month would be able to join the fast-growing program that insures children from low- and moderate-income families. But the statement suggests that the program is expanding when in fact, under the governor’s plan, no new children could be enrolled in the program until others leave. The governor estimates that 20,000 children lose eligibility each month.

Public safety


Schwarzenegger: “To me, public safety is the most important thing, much more important than any of the financial things here and the budget.”

Budget: Schwarzenegger has pledged that no prisoners will be released from California’s prisons in order to cut costs. But the governor’s budget envisions $438 million in unspecified cuts in the prison system. And by taking $1.3 billion in property taxes from California cities and counties, the governor’s budget may leave police departments, sheriff’s departments and local jails with budget shortfalls of their own.

Tricks and gimmicks

Schwarzenegger: “In the last two budgets, the easy choices were made. Those budgets were shell games, using tricks and gimmicks to put off the hard decisions until after the next election cycle.”


Budget: Schwarzenegger’s budget relies on some of the same techniques that he has criticized. The governor assumes use of $3 billion from a deficit bond that voters have yet to approve. He would divert $1 billion that Californians had voted to reserve for transportation programs. He would also balance the budget using $950 million in pension bonds, although an earlier borrowing plan was ruled unconstitutional.


Schwarzenegger: “Because Sacramento didn’t control spending, we have inherited debt of $22 billion.”

Budget: It is true that Sacramento has not controlled spending in recent years. The state lost $14 billion a year in income tax receipts from stock options and capital gains after the stock market bubble burst three years ago. But the $22 billion is not all inherited. The sum includes $3 billion that the state lost when Schwarzenegger repealed the state’s car tax increase upon taking office.


Revenues and expenses

Schwarzenegger: “Over the past five years, state revenues grew by 25%. But spending increased by 43%.”

Budget: Spending has outstripped revenue growth in recent years, but the exact rate is debatable. Some of the imbalance is the result of a 1998 cut in the vehicle license fee under Gov. Pete Wilson. Without the car tax cut, spending increased 27% over those five years.



Schwarzenegger: “We will not raise taxes.”

Budget: While including no new taxes, the governor’s budget relies on tuition hikes for students of state colleges and universities as well as community colleges.


Schwarzenegger: “K-12 spending will grow by $216 per child, per year.”


Budget: Funding for schools would increase by about $216 per student. But very little of that increase comes from the state (the vast majority comes from local taxes and federal funds). Little of the money will probably end up in classrooms, as most of it is committed to pay for expenses such as servicing debt on school bonds.


Compiled by Times staff writers Noam Levey and Jeffrey L. Rabin