Gov. asks for cuts as state deficit looms

Facing a spring revenue slump for the first time in his tenure, Gov. Arnold Schwarzenegger on Monday proposed filling the gap by selling major state assets and renewing calls for large cuts in programs for the poor, the elderly and public transit.

The governor, who presented a $145.8-billion revised budget to lawmakers, said the moves were necessary to tame a projected deficit that had grown by $1.6 billion since January.

Democrats responded angrily; it was not the news they have grown accustomed to hearing in May. The Republican governor typically has reported a surge of revenue from income tax receipts and has appeased Democrats by abandoning earlier calls for program cuts.

The governor said a shaky economy and increased spending on healthcare, prisons and education -- most of it the result of legal requirements -- mean he has no choice but to make cuts.

The proposal, which calls for privatizing the lottery and the public agency that backs student loans, will now be debated in the Democrat-dominated Legislature, which has until the fiscal year ends June 30 to pass a budget.

Lawmakers’ skepticism of the privatization plans is just one obstacle the governor faces. Democrats do not accept Schwarzenegger’s assertion that the state is so deep in the red that it cannot avoid removing thousands of families from the state’s welfare program, freezing cost-of-living adjustments for low-income elderly and disabled and raiding public transportation accounts for more than $1 billion.

“I wish we could fund all of those programs,” Schwarzenegger said at an afternoon news conference. “But I have an obligation, which is a promise to the people of California that I will bring down the structural deficit to zero, that we will be fiscally responsible.”

Democratic leaders, who worked relatively harmoniously with Schwarzenegger last year, criticized his proposals, calling them quick fixes that disproportionately hurt the less affluent.

“When it’s all said and done, this is reminiscent of the pre-postpartisanship governor,” said Assembly Speaker Fabian Nunez (D-Los Angeles), referring to Schwarzenegger’s depiction of his bipartisan leadership style since his fiscally conservative political program was rejected by voters in the 2005 special election.

The governor’s budget “punishes middle-class, working-class and poor Californians,” Nunez said.

Democrats faulted Schwarzenegger for proposing to pay down billions in state debt ahead of schedule, saying that the funds instead should be used for social services and transportation.

And they were unimpressed with Schwarzenegger’s plan to reap quick windfalls by selling state assets. He is counting on $1 billion from the sale of EdFund, the $27-billion loan-guarantee agency, to balance the budget. Schwarzenegger says money from lottery privatization would not be available until late next year at the earliest, and that the funds could be used to wipe out future deficits.

Democrats suggested that such privatizations, which offer a one-time infusion of cash, do not solve the state’s long-term financial challenges. Senate Leader Don Perata (D-Oakland) called them “little mix-and-matches” that would push deficits into the future.

Schwarzenegger defended the proposals as “outside-the-box” thinking that would allow the state to avoid new taxes and otherwise free up money in future years.

“There is a lot of money out there in the private sector,” he said. “They are all looking for investments, and they are all offering a lot of money. Let us go and get involved in public-private partnerships. It’s the great wave of the future.”

California Chamber of Commerce President Allan Zaremberg praised the governor for “proving wrong” those in the Capitol who “have said the only way for California to solve its budget problems is to raise taxes.”

The sentiment was shared by Republican lawmakers, though some complained the proposed budget did not go far enough to rein in spending.

Senate Republican Leader Dick Ackerman (R-Tustin) said the plan “does not raise taxes and reduces debt but does not go far enough.”

Many others were more critical, particularly local governments, which stand to lose about $1 billion in public transit money. Roger Snoble, chief executive of the Los Angeles County Metropolitan Transportation Authority, said the agency might have to reduce its planned purchase of new buses and rail cars.

“It’s just going to add to the misery,” said Snoble, whose agency would lose $230 million under Schwarzenegger’s plan. “It’s going to affect everybody who moves in Los Angeles County.”

Advocates for the poor were also alarmed by the proposal, which the nonprofit Western Center on Law and Poverty estimated would result in the loss of cash assistance for 155,000 children.

The governor’s plan calls for eliminating the assistance for families on welfare who do not meet work requirements, and reduces “safety net” grants intended to keep children in such families from becoming homeless. It would also suspend a cost-of-living adjustment for families receiving welfare.

A planned increase in cash grants for low-income Californians who are elderly or disabled would be eliminated under the governor’s proposal, as would an increase in wages of workers who care for them.

“Our governor has opted to hurt those least able to fight him,” said Bill Powers, vice president of the California Alliance for Retired Americans. “It’s simply disgraceful.”

Not everyone was displeased, however.

Public schools would see a boost in funding of several hundred million dollars more than the governor proposed in January, the result largely of spending formulas etched into state law. The governor is also proposing hundreds of millions in cash grants for schools to use on safety programs, career technical education, literacy programs, teacher hiring and healthful meals.

A proposal to increase spending on preschools by $50 million drew praise from children’s advocates.

State university students didn’t fare as well, however. Fees are expected to rise as much as 10% in coming months.

As for the plan to sell EdFund, it drew mixed reviews. It comes as other states are beginning to reexamine ties to private lending institutions amid allegations that lenders have provided kickbacks to school officials who steered students their way.

Loan guarantors like EdFund have not been implicated in these investigations.

But Steve Boilard, director of higher education at the nonpartisan Legislative Analyst’s Office, said a bill pending before Congress to limit abuses could also reduce the amount of profit to be made on guaranteeing loans, and that could lower the market value of EdFund below the $1 billion Schwarzenegger anticipates.

evan.halper@latimes.com

jordan.rau@latimes.com

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Times staff writers Jean Guccione, Jeffrey L. Rabin and Janet Wilson contributed to this report.

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The highlights

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Among the governor’s plans for addressing the budget shortfall:

$1 billion -- Use a windfall from the sales tax on gasoline for public transportation projects to balance budget

$1 billion -- Sale of EdFund, a state student loan agency, to a private firm

$589 million -- Cut welfare

$37 billion -- Sale of state lottery to private firm*

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Source: State Department of Finance

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*Proceeds would not be used to balance upcoming budget but could help wipe out projected shortfalls in future years.