Governor warns of deep fiscal crisis as he unveils California budget plan

Gov. Arnold Schwarzenegger warned Friday that the state remained deep in fiscal crisis and proposed steep reductions in almost every major government program, but many lawmakers quickly dismissed his ideas as stale and vowed to push for alternatives such as tax hikes.

His proposal, aimed at closing a $19.9-billion gap, and the response to it foreshadow another year of paralysis in Sacramento as the governor and lawmakers struggle with the latest crippling shortfall.

The new budget blueprint -- the governor's last before term limits force him from office -- comes after the state's epic financial problems have already become a target of ridicule around the world. Even after $60 billion in program cuts, tax increases and federal stimulus money over the last year, California's books are so far out of balance that the state is once again in danger of having to issue IOUs.

The governor announced that he would declare a fiscal emergency and immediately call the Legislature into a special session to make budget cuts. His plan includes no new broad-based tax increases. It relies instead on seeking billions of dollars in new federal money and on steep reductions in education, healthcare and social services, as well as cuts in mass transit, state worker pay and environmental programs.

"California is not Washington. We don't have the luxury of printing money or running trillion-dollar deficits," Schwarzenegger said at a news conference Friday morning. "I refuse to raise taxes, because there are so many areas where California can be smarter, more efficient and save precious taxpayer dollars."

Republicans and business groups were supportive of the framework. "Tough choices are going to have to be made in this budget, but they are no different from the tough choices that every California family has had to make in these tough times," said Senate Republican Leader Dennis Hollingsworth of Murrieta.

But Democrats who dominate the Legislature, labor unions and advocates for the poor were dismissive.

"With regard to the bulk of the budget proposal, I have one reaction: You've got to be kidding," said Senate leader Darrell Steinberg (D-Sacramento). Assembly Speaker Karen Bass (D-Los Angeles) called the proposal a "big pile of denial."

They and other Democrats derided Schwarzenegger's plan as a retread of ideas they dismissed last year. "This is a recycled budget," said Senate Budget Committee Chairwoman Denise Ducheny (D-San Diego). "These are exactly the same proposals he made last year. We talked about them, we rejected them, we did as much as we thought we could do, and he's come back with the same ones that he had before."

Democrats did applaud the part of the governor's plan that relies on the federal government stepping forward with $6.9 billion in new funds for the state -- money that he says California is owed as a result of various federal mandates. But it is far from clear that those funds will materialize. Members of California's congressional delegation cautioned the state against relying on Washington to backfill California's budget hole.

Rep. Zoe Lofgren of San Jose, head of the California Democratic delegation in the House, said Schwarzenegger "sounds like he's trying to avoid responsibility. He's the governor. We're not. There has been a financial storm brewing in California for years. They haven't dealt with it."

If the new federal funds don't come, the governor has proposed additional cuts that include eliminating the CalWorks welfare program and the state's large network of subsidized in-home healthcare providers for the poor, elderly and disabled.

Health insurance for 900,000 poor children could also be eliminated if the federal funds don't materialize, as well as large corporate tax breaks that have recently been put in place.

Even if help from Washington arrived, California would still face severe cutbacks.

Under the governor's plan, state funding formulas would be changed to reduce payments to schools and community colleges by $2.4 billion. The proposed cuts come after school spending has already been rolled back considerably and many districts have been forced to impose layoffs, eliminate programs and increase class sizes.

Schools would be given the option of reducing the academic year by up to five days to absorb the effect of the cuts. Specific programs targeted for cuts include class-size reduction.

School groups expressed outrage at the proposed cuts, after the governor vowed earlier this week in his State of the State address to protect school funding in his budget. "We are stunned and perplexed," said Kevin Gordon, a lobbyist for hundreds of school districts.

The governor would slash Medi-Cal healthcare for the poor while raising premiums and patient co-payments. Medi-Cal benefits for new, legal immigrants who have lived in the country less than five years would be eliminated.

Meanwhile, fewer children from low-income families would be eligible for subsidized health insurance; those that would remain on the rolls would pay more and no longer receive vision coverage. Voters, who last year rejected proposals to scale back costly social services programs created by citizen initiative, would be given another option to do so.

Some $950 million would be cut from the In-Home Supportive Services program, which helps the elderly, infirm and disabled live independently. The governor would tighten eligibility requirements for the program and pay minimum wage to those providing the in-home care. Similar cuts were approved last year but have been blocked by the courts. The governor assumes that the state will prevail in those cases -- which is not assured.

He also proposed eliminating adult day healthcare -- another option short of sending the elderly and sick to nursing homes. The move would save $104 million.

Monthly cash grants to the low-income elderly and disabled would be cut from $845 to $830, the federal minimum.

In 2009, California voters rejected two ballot measures that would have redirected funds from early childhood and mental health programs to balance the budget. But Schwarzenegger proposed returning to the electorate in June to take a combined $1 billion from those two programs to balance the state's books.

He also proposed ending the mandated furloughs of state workers three times a month and cutting pay and benefits. Union leaders question whether such pay cuts could be enacted without returning to the bargaining table.

In the corrections system, the governor proposed slashing funds for prison inmate healthcare by $811 million. Federal judges have already appointed a health czar to oversee the broken health system. That receiver has approval to spend money on inmate healthcare regardless of what Schwarzenegger and the Legislature allocate.

One of the biggest losers under the t plan would be public transit. Through a complex gas tax swap, which would eliminate the sales tax on gas while raising the per-gallon excise tax, about $1 billion would be siphoned from bus and rail funds.

The shift would gut Proposition 42, a voter-approved measure that determines how gas tax money is currently split. Mass transit, which now receives 20% of the taxes, would be cut out of the equation. Drivers would pay slightly less at the pump.

"Once again, the governor offers shell games instead of solutions, and transit riders in California again suffer the consequences," said Joshua Shaw, executive director of the California Transit Assn.

Although the plan lacks broad-based tax hikes, it does include a 4.8% surcharge on residential and commercial property insurance to pay for fire protection, reviving a past proposal that lawmakers have rejected. The surcharge would raise $238 million in the coming fiscal year and $479 million in the next one.

The governor is also proposing to fund state parks by resuscitating a plan rejected by legislators last summerthat sought to raise money withadditional oil drilling off the Santa Barbara coast. That would generate an estimated $200 million for the budget. Environmentalists are vowing to kill the proposal.

evan.halper@latimes.com

shane.goldmacher@latimes.com

Times staff writers Patrick McGreevy and Michael Rothfeld contributed to this report from Sacramento. Times staff writer Richard Simon contributed from Washington.

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