‘Broken System’ Budget Unveiled

Gov. Arnold Schwarzenegger unveiled a $111.7-billion state budget Monday that includes tough cuts in healthcare and transportation, scales back payments to schools and relies on billions in borrowing to make it through next year.

The governor stuck to his promise not to propose any new taxes. But the plan to close a projected $8.1-billion shortfall demonstrates in human terms what sacrifices Californians may have to make to avoid a tax hike.

A boost in money for local schools would be put off -- even as national reports suggest California’s education system is in trouble. As commuters spend more time than ever sitting in traffic, more than $1 billion worth of payments for road projects would be canceled.

The plan would cut welfare benefits, the pensions of teachers and other public employees, and the salaries of workers who provide home care to the frail elderly and disabled.

University students would get hit with fee hikes, and tens of thousands of low-income Californians would have to begin paying premiums to get healthcare. Visits to the dentist for poor people would be limited. Thousands of low-income seniors would lose their renter’s tax credit.

The proposed budget is larger than the current year’s spending plan of $105 billion. But that increase is not enough to avoid dramatic cuts in services.

“This budget doesn’t have much in it I want,” Schwarzenegger said, “but the fact is it is a budget that is forced upon us by a broken system. This is all the money we have. We must live within our means.”

Schwarzenegger acknowledged that his budget proposal doesn’t make it all of the way there because the state still spends more than it collects in revenue.

Even after the current shortfall is erased, a new multibillion-dollar deficit would materialize within a year.

To help ultimately end the chronic budget gap, the governor is proposing a constitutional amendment that would force indiscriminant spending cuts whenever the state falls into the red.

Monday’s proposal is only the first step in a deliberative process that will stretch into the summer. And, as in most years, the resulting budget probably will bear little resemblance to what the governor submitted.

For some, the budget contained good news: As the Republican governor pledged last year, his plan did not hit cities and counties as hard as in years past.

It would add new auditors to hunt down tax cheats, reform the parole system for juveniles and attempt to give low-income Californians access to discounts on prescription drugs.

But even Republicans did not attempt to sugarcoat the proposal as anything other than tough.

“There’s no question this budget appears bloody,” said Assemblyman Tim Leslie (R-Tahoe City), “but these are the wounds made by a surgeon working to heal a very sick patient. If we fail to restore fiscal health now, the consequences will be far more disastrous than any short-term pain.”

Still, Democrats and a chorus of activists said the human costs of the plan were simply too high.

“Democrats are not going to break our promise to make sure schools get the funds they need,” said Assembly Speaker Fabian Nunez (D-Los Angeles).

“Democrats ... are not going to allow our highways to continue to crumble. The big losers in this budget clearly are the middle class. If you have children in school, if you commute to work, if you’re a senior citizen seeking tax relief, this is going to squeeze your budget a lot harder.”

The budget now moves to the Assembly and Senate, where Democrats dominate both chambers. Two-thirds of the members must agree -- along with the governor -- before a spending plan can be approved. Although California lawmakers are supposed to accomplish it by the start of the fiscal year July 1, they rarely have made that deadline.

Pressure to alter Schwarzenegger’s proposal will come from all sides: advocates for the poor, business groups, parents, unions and others.

School groups are particularly angry. The Schwarzenegger administration had earlier promised not to cut their funding this year in exchange for their agreement to take a $2-billion cut last year. That deal shielded the governor from attack by the well-financed, politically powerful schools lobby. But now the governor is breaking the deal.

Although schools would actually get more money than the year before, the governor is proposing to reduce by $2.2 billion the payments owed under voter-approved funding formulas. Educators are even more alarmed that Schwarzenegger is proposing a spending cap that would weaken those constitutional protections.

The governor’s cap -- the linchpin of his plan to ultimately stop the state from spending more than it brings in -- could force across-the-board program cuts any time the budget falls out of balance. The cuts also would take effect if lawmakers are unable to reach consensus on a budget by the end of the fiscal year.

“Gov. Schwarzenegger has not only broken his promise to public school children, he proposes breaking the promise of California voters to provide a minimum amount of state funding to support public schools,” said state Supt. of Public Instruction Jack O’Connell. “This is unconscionable, not to mention a bad example for California’s schoolchildren.”

Schools make up roughly 40% of the state budget, and are currently protected from such random cuts by the state Constitution. School officials warn that taking away those protections would destabilize districts, making it impossible for them to plan.

Another of the governor’s proposals directly targets California teachers. Schwarzenegger is calling for the state to stop annually contributing $469 million into the pension fund for teachers. The budget proposes that schools either pick up the tab using other funds, or pass it onto the teachers.

In the area of social services, welfare benefits would be cut, as would the salaries of in-home care workers for the needy. Tens of thousands of participants in the Medi-Cal health insurance program would have to begin making monthly payments, and elderly, blind and disabled patients who utilize the program would be moved into HMOs.

“Despite the ‘no new taxes’ rhetoric, this budget would require hundreds of thousands of California’s children, seniors, and people with disabilities to pay more for health coverage, and many will go without the care they need,” said Anthony Wright, executive director of the nonprofit Health Access California.

The state’s 326,000 workers also are targeted. The governor’s budget doubles the amount they would have to contribute to their retirement funds. It also eliminates two state holidays, and cuts their health benefits. Union officials suggested that their members had no intention of accepting such concessions, which would have to be worked out through collective bargaining.

“In terms of the governor’s proposals to cut wages and benefits, we’ll see him at the bargaining table,” said Jim Hard, president of Service Employees International Union Local 1000, California’s largest state employee union. “He should bring his proposals that show us how his corporate contributors will pay for their fair share to reduce the deficit.”

But Schwarzenegger said the state simply can’t afford the status quo.

“Year after year, politicians have promised increases in healthcare, increases in education, increases in pensions, increases in this, increases in that,” he said. “My administration and every Legislature loves to give those kinds of things. But we don’t have the money.... If you don’t have the political courage, we will have financial suicide.”

There was one group with few complaints about the governor’s proposal: local governments. Like educators, local officials brokered a deal with the governor for protection against cuts beyond what was in last year’s budget. But unlike the education deal, that one went before voters in November and has now been embedded in the state Constitution.

“There are no gimmicks in the budget to try and take anything away from us,” said David Janssen, Los Angeles County’s chief administrative officer. “This is what we’ve said all along, ‘You need to address your expenditures.’ But it’s their issue to deal with, not ours.”

Yet some of the cuts the state is making will filter down to the local level. Scores of road projects, for example, probably will continue to be put off as the governor proposes raiding $1.3 billion of Proposition 42 gas tax revenue earmarked for transportation.

“It means that transportation projects will be sacrificed ... that means more congestion and bad air quality,” said Mark Pisano, executive director of Southern California Assn. of Governments, the planning consortium for Los Angeles, Ventura, Orange, San Bernardino, Riverside and Imperial counties. “Sacramento has got to come to terms with its spending. They can’t keep taking from infrastructure and local government and transportation.”

Voters passed Proposition 42 in 2000 to guarantee that gasoline sales tax revenue would be used to improve roads and mass transit. Counting on that money, state and local transportation agencies began drafting improvement plans. But many of those projects have been stalled.

The state’s colleges and universities largely avoided the kind of cuts they endured last year. But as part of an agreement that they reached with the governor at that time, there will be tuition hikes of roughly 8% in the California State University and University of California systems.

The governor also is proposing to cut aid for low- and moderate-income students attending private schools in California. The budget would reduce Cal Grants for incoming freshmen and transfer students next year at the state’s private schools by 10.5%, or $873, down to $8,322 annually. That would follow a cut of 14.3%, or $1,386, that was imposed on entering students this school year.

Despite all the bad news, Republicans and anti-tax groups applauded the governor’s plan. They noted that even with the program reductions, the state still would spend billions more than it did last year.

“The spending lobby is at it again, protesting phantom cuts, when the real message is the governor is not proposing to increase spending as much as they’d like,” said Larry McCarthy, president of the California Taxpayers Assn. “The various interest groups wail over what they perceive to be ‘cuts,’ but they are actually getting more -- not less -- than the current year. Not getting as much as you’d like is not a cut.”

Added state Sen. Dave Cox (R-Fair Oaks), who was intimately involved in the budget process under former Gov. Gray Davis: “Had this level of fiscal responsibility been executed over the past five years, we would not be facing such a daunting challenge today.”

Times staff writers Jessica Garrison, Duke Helfand, Peter Y. Hong, Jack Leonard, Caitlin Liu, Carla Rivera, Robert Salladay, Stuart Silverstein and Rebecca Trounson contributed to this report.

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Sample cuts

Health and Human Services is one area facing cuts in the governor’s proposed budget:

Reduce grants to families in the state’s welfare-to-work program (CalWORKs) by 6.5% Savings: $212 million

Suspend the July 1 cost of living adjustment to CalWORKs recipients Savings: $163.8 million

Cut the state’s share of compensation to caregivers for the elderly and disabled from $10.10 to $6.75 Savings: $195 million

Source: Governor’s budget **

Where the money goes

Gov. Arnold Schwarzenegger’s spending plan for the 2005-06 fiscal year would increase general fund expenditures to $85.7 billion from last year’s $82.3 billion. Here’s how it breaks down:

*--* ‘04-’05 ‘05-06 percent Program (in millions of dollars) change Legislative, judicial, executive $2,873 $3,016 5.0% State and consumer services 535 563 5.2% Business, transportation and housing 377 380 0.8% Resources 1,067 1,270 19.0% Environmental protection 74 69 -6.8% Health and human services 25,543 26,708 4.6% Youth and adult corrections 6,933 7,014 1.2% K-12 education 34,435 35,884 4.2% Higher education 9,363 10,042 7.3% Labor and workforce development 87 87 0.0% General government 1,008 705 -30.1% *--*

State revenues and spending

The state continues to spend more than it receives in taxes. The governor’s plan addresses that imbalance by slowing the increase in spending to 4.2% in a year when revenues are projected to grow by 6.8%. Where the state’s revenues come from, and how they are spent:

*--* (Percent of total) Personal income tax: 50.2% Sales tax: 31.5% Corporation tax: 10.5% Insurance tax: 2.7% Liquor tax: 0.4% Tobacco taxes: 0.1% Other: 4.6% *--*

General fund expenditures (Percent of total)

*--* K-12 education: 41.9% Health and human services: 31.2% Higher education: 11.7% Youth and adult corrections: 8.2% Legislative, judicial, executive: 3.5% Resources: 1.5% General government: 0.7% State and consumer services: 0.7% Business, transport & housing: 0.4% Environmental protection: 0.1% Labor and workforce development: 0.1% *--*

Source: Governor’s budget. Graphics reporting by Maloy Moore