Opening Volley in Yearlong Fight for Control of Spending

Whether the budget Gov. Arnold Schwarzenegger sent to the Legislature on Monday will solve the state’s perennial deficit problem remains to be seen. But that’s not the point.

Rather, the governor’s plan starts what is sure to be a yearlong fight for control of state spending, a battle that could determine how the state shapes its budget for years to come. Proposing a second year of cuts in some social and educational programs and a new round of borrowing, the Republican who came to town to “blow up the boxes” has made it clear that this is the year for the showdown.

Even as he announced a plan that would make more social welfare cuts than last year but uses many of the same mechanisms to balance the budget, Schwarzenegger decried it -- underscoring that what he wants is an overhaul of the way California legislators create spending plans. “This budget is not anything that I want,” he said.

Schwarzenegger and his aides detailed a $111-billion plan that, while increasing spending 4.2% overall, would trim some health and welfare programs, even as overall spending on social services rises by 4.6%.

He is also calling for changes in one of the most untouchable of programs -- the formulaic way public schools are funded. It’s one that Democrats and their allies, the powerful California Teachers Assn., are sure to defend fiercely.

He wants to temper the increase for public schools, while also raising tuition for public university students. And he is calling for borrowing as much as $6 billion -- despite a vow last year that the state would never again spend more than it took in.

Schwarzenegger enters the fray with roughly 70% of the electorate approving of his performance, according to a variety of polls. In the view of many budget experts, he also begins the spending fight having promised more in his first year than he delivered.

The budget he signed last year imposed few significant cuts and relied heavily on borrowing. By serving up a plan that he said last week would “not be pretty,” he hopes to demonstrate that there is one way out of the state’s perennial budget mess -- his way.

“He was elected to shake things up,” said Democratic consultant Darry Sragow, who advises several legislators. “If he is going to fulfill his promise, he has to put the state’s money where his mouth is. We’ll see whether he has the political stamina to do that.”

More details will be filled in as legislators vet the governor’s concepts in a special legislative session he called to address the budget and other issues.

The special session is expected to lead to a special election later this year, as Schwarzenegger asks voters to consider proposals he and legislators may offer them, along with a variety of budget-related initiatives he will embrace.

Most prominent among Schwarzenegger’s proposals will be a cap on state spending.

If that sounds familiar to voters, it is. Schwarzenegger pushed for two ballot propositions in March, including one sold to the electorate as a spending cap. Voters approved both.

But the problem persisted. Some Schwarzenegger advisors hoped that as the state’s economy expanded, tax payments would grow enough to erase the deficit. Indeed, Schwarzenegger noted that revenue has grown by $5 billion in the last year. But spending rose faster, creating a deficit of $8.1 billion.

Schwarzenegger Chief of Staff Pat Clarey said in a recent interview that the governor concluded that last year’s ballot measure to cap spending “was not enough.” “We learned that we need to put more teeth into it,” Clarey said. Schwarzenegger’s advisors believe the state’s budget problem was a main reason voters recalled Democratic Gov. Gray Davis in 2003. Under Davis, a budget surplus of $12 billion degenerated into a deficit that exceeded $30 billion.

However, Schwarzenegger’s budget represents an increase from budgets signed by the man he ousted in the 2003 recall. During the final four years of Gov. Gray Davis’ tenure, the state general fund -- the portion of the budget filled with general taxes on income and sales -- hovered between $78.1 billion in 2001 and $76.3 billion in the 2003-2004 fiscal year, Davis’ final year.

In Schwarzenegger’s first year, the general fund soared to $82.3 billion. In the coming year, the predicted general fund would be $92.7 billion. Schwarzenegger attributes the increases to preprogrammed spending increases on everything from salaries and state payments to civil servants’ pension funds to health and welfare programs.

It’s no surprise that Schwarzenegger is targeting school funding, which is based on a complex formula approved by voters in 1988. The largest part of the increase is attributable to public schools and community colleges.

In the coming year, the budget shows, the state is obligated to spend $36.5 billion from its general fund on K-14th grade. That represents a $6-billion increase from 2003.

Last year, Schwarzenegger used $11.3 billion from the bond approved by voters in March to restructure the state’s debt, and soften many of the cuts he initially suggested in his first budget. At the time, he told voters the bond measure would prohibit “borrowing to pay deficits ever again.”

On Monday, he continued to denounce borrowing, even as he proposed to balance the coming budget by borrowing an additional $6 billion, according to calculations by Treasurer Phil Angelides, a Democrat who will probably challenge Schwarzenegger in 2006.

In fashioning his budget, Schwarzenegger is invoking ideas offered more than a decade ago by one of his mentors, Republican Gov. Pete Wilson. Like Wilson, Schwarzenegger is targeting health and welfare spending, proposing to cut welfare grants by 6.5%. In another page from the Wilson years, the governor is targeting state pensions.

Most notably, Wilson placed a plan for taking control of the budget before voters in 1992. The idea failed, garnering 46% of the vote. At the time, the state was mired in a recession, and Wilson’s popularity was at its nadir.

By contrast, Sragow noted, Schwarzenegger “clearly has political capital to spend.”

Sragow added: “This kind of debate could be the best thing to happen to California.”