Governor Taps Into a New Cash Flow

Gov. Arnold Schwarzenegger on Friday unveiled a revised state spending plan that uses billions of dollars of unanticipated revenue to roll back some of his earlier budget cuts, launch new government programs and scale down the state’s debt.

An uptick in the economy and higher-than-expected returns from an amnesty program for Californians who owed back taxes have left the state with $3.9 billion more than forecasters had projected, the governor said. He proposed using the revenue for a variety of programs and to wipe out the need to borrow to balance the budget for the fiscal year that begins July 1.

But Schwarzenegger stopped short of restoring the more than $2 billion that local school officials say they are owed under voter-approved spending formulas. His $115.7-billion budget would leave California well below the national average for spending per student, leading school officials to warn that the plan would further weaken a struggling state education system.

“We would love to spend much more money,” Schwarzenegger said. “But as governor you have to be kind of like a parent who sits there and says ‘no, no, no, you can’t do this, you can’t do that.’ ... You have to look at the total picture.

“It’s a responsible budget that pays down our debt and contains no new borrowing,” he said. “It doesn’t make long-term commitments the state can’t keep.”

Since January, when he submitted his original budget plan, which was full of steep spending cuts in education, transportation and social services, the governor’s approval rating among voters has declined sharply. Administration officials see the revised plan as an opportunity to reverse the trend.

Schwarzenegger has added hundreds of millions of dollars to a small group of programs popular with voters. The plan would restore $1.3 billion in transportation spending, potentially jump-starting scores of projects that have been stalled for years. It puts tax credits and other programs for the elderly poor back in place. And it seeks to neutralize critics from school groups by providing money to reduce class sizes in some of the state’s most troubled schools.

But it also leaves in place billions of dollars in program reductions that Democratic lawmakers and advocacy groups say are unacceptable, leading Assembly Speaker Fabian Nunez (D-Los Angeles) to call the new budget a “sham.”

“It reflects the governor’s values, and unfortunately the governor’s values remain totally out of sync with the values of working-class and middle-class Californians, particularly where it concerns education,” Nunez said.

“This governor simply doesn’t get it. He’s not listening to the people. He’s not listening to the PTA moms, he’s clearly not listening to our teachers and certainly not listening to our children.”

The Capitol’s budget season began in earnest with the release of the governor’s proposal Friday. The Legislature now has until June 15 to meet its constitutional deadline for passing a budget, a target that is rarely met.

If a new spending plan is not in place by July 1, the state must stop making payments to schools, vendors and others until an agreement is reached.

Democrats, who dominate both houses of the Legislature, will propose next week their own budget plan, which they say may include new taxes.

State Treasurer Phil Angelides, a Democrat who has said he intends to run for governor in 2006, says Schwarzenegger has already effectively taxed Californians at the bottom of the income scale with $1.6 billion worth of new fees for social service programs and tuition increases at community colleges and public universities. Angelides says it is now time for taxes on the wealthy to go up.

“The governor is very capable of saying ‘no, no, no’ to children in the classroom,” Angelides said. “He apparently has a very hard time saying ‘no, no, no’ to the wealthiest among us.”

Both the governor and the Legislature are searching for long-term solutions to keep the state from running annual multibillion-dollar deficits. Despite the new money that has come into government coffers, California’s budget remains chronically out of balance, with the cost of state programs projected to rise faster than revenues.

State forecasters, meanwhile, predict that the economy will cool. They say this year’s revenue surge cannot be counted on to repeat itself in the future.

The governor’s revised plan attempts to deal with the problem -- in the short term, at least -- by setting aside $1.7 billion of borrowing that he had earlier proposed be used to close the deficit. He is also calling for the state to pay $600 million owed to cities and counties now instead of setting that bill aside until fiscal 2007, when it is due.

But his longer-term solution is a constitutional spending cap intended to limit the growth of government programs. Schwarzenegger’s political allies have submitted signatures to put such a measure on the ballot. It is part of a package of initiatives the governor wants to bring before voters this fall in a special election.

Yet as the governor looks for ways to reduce state costs, his revised budget includes billions of dollars in new spending compared with his January plan.

The largest chunk of that money would go toward transportation. The governor has abandoned his plan to use $1.3 billion worth of taxes from gasoline sales to balance the budget and instead wants to return it to road projects. The move would for the first time fulfill the promise of Proposition 42, approved by voters in 2002 to ensure that state roads are kept in good repair. However, lawmakers annually exercised a provision that let them suspend the measure in emergencies.

The restoration would help pay for 600 transportation projects that have been on hold during the budget crunch, according to Sunne Wright McPeak, secretary of Business, Transportation and Housing.

McPeak said the governor’s proposal “will generate 25,000 jobs and will be an important jump-start” to repairing and developing the state’s transportation infrastructure.

Under a financial formula set out in Proposition 42, $678 million would go to congestion relief, $254 million would be spent on highway improvement, $254 million would go to cities and counties for deferred maintenance on local roads and $127 million would be used for public transit.

McPeak was not specific about which projects would be funded, saying that was up to the California Transportation Commission.

The governor is also proposing to put $252 million into education initiatives geared mostly toward shrinking the size of classes in low-performing schools, as well as attracting more teachers to those schools.

“More investment in education works best when the money is tied to programs that get results,” Schwarzenegger said. “My budget invests more in education than California has ever invested before.”

School groups were unimpressed. They said such moves do not address the larger problem of inadequate resources for the state’s students.

The governor, school officials say, promised that he would give them the more than $2 billion they are owed under voter-approved spending formulas after schools agreed to forgo that money to help balance the budget last year. Facing an $8.6-billion budget shortfall in January, the governor reneged. School officials have launched an aggressive -- and effective -- advertising blitz against him on the issue.

“It’s a lot of special effects and fireworks and no substance,” said Barbara Kerr, president of the California Teachers Assn. “He is talking about all this money he is giving, but if you look at the difference between January and now, it is a couple of hundred million dollars. He owes us $2 billion.”

School groups and legislative Democrats say Schwarzenegger must increase funding by at least $600 per student over the amount in his January budget plan. Friday’s proposal, according to the administration, increases it by $17 per student.

The amount of new money for the state’s public colleges and universities is also modest. The governor dropped his proposal to reduce the ceiling on Cal Grant awards for students at private colleges. Those students would remain eligible for grants of as much as $8,322.

The state’s sheriffs praised Schwarzenegger for restoring an $18.5-million program to help pay for law enforcement in rural areas. Schwarzenegger also scaled back a reduction in prisoner and parolee programs that critics said undermined his pledge to expand rehabilitation programs for felons. The governor put back half of the $95.3 million he had initially proposed to cut.

His revised budget also seeks to prevent a threatened class-action lawsuit over poor dental care in prisons by allotting $17.3 million for inmate care.

In the area of social services, Schwarzenegger has scrapped one of the most controversial proposals: taking a tax credit for renters away from thousands of poor seniors. The governor is also proposing to use leftover housing bond money for an initiative to combat homelessness and to expand efforts to fight the West Nile virus.

Advocates for the poor were pleased but said some of the governor’s toughest cuts remain on the table. Those include a plan to reduce the pay of some 300,000 workers who provide in-home care for the elderly and disabled from $10.10 per hour to the state minimum wage of $6.75.

Carolynn Heilig, a caregiver for a 74-year-old quadriplegic in Larkspur, Calif., said the cut would be devastating.

“What other job in this country, except if you misbehave or the company folds, do they pull the rug out from under you like that?” asked Heilig, who is 63 and lives in her patient’s house. “That would be a third of my income gone. There are people who will lose their homes, lose their cars. And the safety net into which workers would fall is being whittled away.”

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Times staff writers Sharon Bernstein, Duke Helfand, Jordan Rau, Rebecca Trounson and Jenifer Warren contributed to this report.