Governor’s plan takes flak from Democrats

SACRAMENTO – A new state spending limit proposed by Gov. Arnold Schwarzenegger yesterday was hit with a cross fire of criticism, raising doubt about whether the Legislature will meet a deadline late next week for putting the governor’s budget plan on the March ballot.

The spending cap, which resembles one approved after the passage of the landmark Proposition 13 property-tax cut but loosened a decade later by an initiative, is linked to Schwarzenegger’s proposal for a $15 billion bond to refinance inherited debt.

State Finance Director Donna Arduin laid out Schwarzenegger’s proposal in back-to-back hearings in the Assembly and Senate. Democrats, however, generally seemed to prefer the current budget plan signed last September rather than the permanent spending cap and larger bond proposed by the governor.

Sen. Denise Ducheny, D-San Diego, said a permanent spending limit would prevent the state from restoring previous budget cuts that have reduced health care and enrollment in higher education.

“It sounds to me like what we are doing is permanently dooming the state to never get back up to par in places that we have cut because of the immediate crisis,” Ducheny said.

Some Democrats said they feared the proposed spending limit would interfere with the Proposition 98 school-funding guarantee, particularly if surplus money available in good years is not spent on schools, but placed in a proposed “rainy-day” reserve.

Other Democrats were concerned about Arduin’s statement that the spending limit would require “prioritizing” health care needs, determining who does and does not receive care, such as medicine for AIDS patients.

Criticism for Davis

Arduin began her presentation to committees in both houses with a sharply critical overview of state finances over the five-year administration of former Gov. Gray Davis, who was ousted in a historic recall election Oct. 7.

Although revenues increased 25 percent during those five years, Arduin said spending increased 43 percent as the state, through various forms of borrowing, spent $23 billion more than it took in. She said that if spending had stayed in line with economic growth, the budget would be balanced.

“California faces massive budget deficits,” Arduin said, “and has run out of places to borrow.”

The governor’s limit would require that spending next fiscal year not exceed the revenue forecast that the Department of Finance will make in May. In the following years, spending would be limited to the amount of growth in inflation and population.

That’s similar to the “Gann” spending limit, which was named after one of the authors of Prop. 13 and approved in 1978. An initiative in 1990 changed the formula to include population and personal income growth, and the spending limit has had little impact since.

In addition to reinstating the Gann formula, the administration proposal would create the rainy-day reserve for revenue above the spending limit.

With a two-thirds vote of the Legislature, that reserve could be used for repaying deficit bonds, tax rebates, emergencies declared by the governor, or transfers to the general fund when revenue falls below the spending limit.

Arduin said if the limit had been in place the past five years, spending and revenue growth would have matched, about 5 percent annually. She said higher government spending would begin to harm private-sector growth and reduce jobs.

Bond debate

Schwarzenegger is urging the Legislature to act swiftly to meet a Dec. 5 deadline for placing the constitutional spending cap and the $15 billion deficit refinancing bond on the March ballot.

The governor wants the bond linked to a spending limit to assure lenders that the bond will be repaid and to begin the painful process of cutting spending to match state revenue.

But Democrats, who don’t like the spending limit, also questioned whether the $15 billion bond proposed by Schwarzenegger is a significant improvement over the $10.7 billion bond already in the budget.

The governor’s replacement bond is larger, and the payment would be not over five years but perhaps 20 years or more, reducing the annual debt payment by up to $1 billion.

And importantly, if voters approved the governor’s proposed bond, it would not be at risk of being blocked by a legal challenge.

The conservative Pacific Legal Foundation has filed a lawsuit to impede the $10.7 billion deficit bond, contending that it violates a provision in the state Constitution that requires voter approval of long-term debt of more than $300,000.

A similar lawsuit has resulted in a trial court ruling that bars a $1.9 billion pension bond in the budget. The state is appealing the ruling.

Democratic leaders, such as Senate President Pro Tempore John Burton, D-San Francisco, say the deficit bond can withstand a legal challenge.

Unlike the pension bond, the $10.7 billion deficit bond would be paid off with a dedicated revenue stream, a half-cent of the current sales tax. And because the annual bond payment would have to be appropriated each year by the Legislature, the legal argument is that it’s not “long-term debt.”

Before Schwarzenegger took office, Democrats thought the budget problem was limited to a shortfall in the fiscal year that begins July 1 that increased to $10.2 billion from $8 billion. The nonpartisan legislative analyst estimated the state would end the current year with a $600 million reserve.

But when the governor was sworn in last week, he kept a campaign promise and repealed a tripling of the vehicle license fee that had taken effect Oct. 1. Schwarzenegger said he wants the state to replace the fee revenue that local government will lose, which is about $3.6 billion this fiscal year and $4.2 billion next year.

If the state does repay local government for the lost revenue, the budget shortfall over the next 18 months would be nearly $18 billion. Schwarzenegger wants to close the gap without raising taxes.

The governor’s proposal on Monday to begin narrowing the gap with $1.9 billion in cuts this fiscal year, which will be heard by legislative committees next week, drew loud protests from Democrats. But those cuts don’t have to be enacted by the Dec. 5 deadline.

Commitment to cities

Meanwhile, during a meeting yesterday with 10 California mayors, Schwarzenegger “reconfirmed his commitment to make the cities whole” by replacing money they would lose through the rollback of the car tax, San Diego Mayor Dick Murphy said.

Speaking at a Lindbergh Field news conference yesterday after returning from Sacramento, Murphy said, “We are not out of the woods yet because the legislators haven’t passed the bill to reimburse the cities.”

San Diego would lose about $50 million under the car tax repeal unless the money is replaced, he said.

As for education, Schwarzenegger has proposed paring more than $223 million over the next 19 months from California’s public universities.

The governor’s proposed cuts to the University of California and California State University systems target student-recruitment programs, which were cut in the past year. In the 200,000-student UC system, the cuts would eliminate state funding for the programs, which have been used to help the university open access to students from poorer and disadvantaged schools.

UC President Robert Dynes said in a statement that he was particularly concerned about possible cuts to outreach.

For the past two years, UC and the 410,000-student CSU system have shouldered significant cuts in outreach, research and student services, among others. Last year, both systems hiked student fees about 40 percent, one of the largest increases in the nation.

“These cuts will be painful,” CSU Chancellor Charles B. Reed said yesterday. “California’s students and employers will suffer if the state’s largest university system continues to be severely underfunded.”