Schwarzenegger sees opportunity in budget crisis Print E-mail
Written by Juliet Williams, AP Writer   
Tuesday, 02 June 2009 14:51
(AP) — California's worsening budget crisis holds both pain and promise for the state's future, Gov. Arnold Schwarzenegger told a joint session of the Legislature on Tuesday, as he urged lawmakers to act quickly to solve the state's fiscal mess.

The state faces deep cuts to education and other core programs to plug a $24.3 billion deficit, while a steep decline in tax revenue has created a looming cash crisis that jeopardizes its ability to pay its day-to-day bills.

Even in such dire circumstances, Schwarzenegger said California can emerge more efficient and fiscally stable if lawmakers take steps to restructure government and rethink the services it provides with the revenue it has.

"We can only spend what we have. That is the harsh but simple reality," he said in the rare midyear appearance, which lasted less than 15 minutes. "Our wallet is empty, our bank is closed and our credit is dried up."

The governor's speech comes just four months after he and lawmakers agreed to a two-year budget package that was intended to close a deficit of $42 billion through mid-2010.

Declining tax revenue and overly optimistic assumptions about the tax increases they approved in February have reopened the state's deficit.

Schwarzenegger said state tax revenue has dropped 27 percent from last year and has returned to 2003 levels.

In a letter to legislative leaders last week, Controller John Chiang warned that California will run out of money to pay its bills on July 29. He called on lawmakers to pass a balanced budget by their June 15 constitutional deadline so the state can access short-term loans in a tight credit market.

Its new fiscal year begins July 1.

"California's day of reckoning is here," Schwarzenegger said.

He has outlined a series of cuts that include an additional $5.2 billion reduction to public schools, laying off 5,000 state workers and further cutting the pay of another 200,000. He has proposed eliminating welfare for 500,000 families, terminating health coverage for nearly 1 million low-income children and closing 220 state parks.

"People come up to me all the time, pleading, 'Governor, please don't cut my program.' They tell me about how the cuts will affect them and their loved ones," Schwarzenegger said. "I see the pain in their eyes and I hear the fear in their voice. It's an awful feeling. But we have no choice."

The Republican governor and legislators of his own party say they will not raise taxes, after agreeing to $12.8 billion in higher sales, personal income and vehicles taxes earlier this year.

Democratic and Republican lawmakers agree they face a series of bad choices. The Democratic leaders of the Assembly and Senate pledged to work quickly to resolve the deficit but said they would resist cuts that would wipe out vital programs, particularly those for children and the poor.

"I'm not saying they aren't going to be large cuts or painful ... This is going to be traumatic to a lot of programs and a lot of people, but we are committed to avoiding the wholesale elimination of major investments that matter to the people of California," said Senate President Pro Tem Darrell Steinberg, D-Sacramento.

He praised Schwarzenegger's "can-do" approach, while other lawmakers were less charitable.

Assemblyman Tom Ammiano, D-San Francisco, said Schwarzenegger glossed over his own role in creating California's fiscal crisis and showed a "cavalier" attitude about the problems.

"He didn't take any responsibility. It's hard to believe he really does care," Ammiano said. "I think it trivialized the crisis, really."

Republican leaders said the state needs to enact dramatic reforms to its programs along with sweeping cuts.

"With a 27 percent decline in revenue, it's not clear that a surgical approach is realistic," said Assembly Minority Leader Sam Blakeslee, R-San Luis Obispo. "There are those who would like to say that these changes can be achieved without pain and financial consequences. I don't share that view."

All four legislative leaders were scheduled to meet with Schwarzenegger later Tuesday.

In the May special election, voters rejected all five budget-related measures placed on the ballot by Schwarzenegger and legislative leaders. That included three the governor said would have raised about $6 billion. Another measure would have extended the tax hikes for one to two years.

Schwarzenegger has said he interpreted voters' rejection as a repudiation of borrowing and further tax increases to balance the budget, but their message is far from clear. On Election Day, many voters said they were simply frustrated about being asked to vote in a non-election year on complicated issues they believe should be decided by elected officials.

Schwarzenegger also asked lawmakers to eliminate some state boards and commissions, reviving parts of his 2004 California Performance Review. While getting rid of them will solve only a fraction of the state's deficit, the action is intended to send a symbolic message to taxpayers.

He also wants to consolidate the departments that oversee financial institutions and merge California's tax-collection operations.

In the revised budget he released last month, Schwarzenegger proposed selling state property, such as the Los Angeles Memorial Coliseum, the state fairgrounds in Sacramento and San Quentin State Prison, which he said would bring in more than $1 billion.

State revenue has continued to plummet as residents have reduced spending and the state's unemployment rate soared to 11 percent. Democratic lawmakers and the Schwarzenegger administration have even inquired about having the federal government give California a loan guarantee, an unprecedented step that is seen as way for the state to lower its borrowing costs.

Chiang, the state controller, said Tuesday that such a guarantee appears unlikely but said U.S. Treasury Secretary Timothy Geithner has indicated the administration wants to help California. The state will take whatever help it can get, Chiang said.

He also advised anyone who thinks Schwarzenegger is bluffing about the severity of the crisis to think again.

"They ought to stop denying it," Chiang said. "This is the worst economic cash situation here in California since the Great Depression."

Personal income throughout the state dropped this year for the first time since 1938, contributing to a revenue decline for state and local governments that has included lower-than-expected sales tax and property tax receipts.

Despite the doom and gloom, Schwarzenegger also tried to convey a more hopeful message, asking lawmakers to rise to the challenge and demonstrate to the rest of the nation that California can dig its way out of its deep budget hole.

The crisis provides an opportunity to make state government operate more efficiently and stretch taxpayer dollars.

"People are writing California off. They're talking about the end of the California Dream," Schwarzenegger said. "Let's prove all the pundits wrong. Let us use this crisis as an opportunity, as an opportunity for great changes, lasting changes."