Caps and cuts dominate governor's State of State

By KEVIN YAMAMURA
BEE CAPITOL BUREAU

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Hamstrung by a $14 billion budget deficit, Gov. Schwarzenegger asked lawmakers Tuesday for a state spending cap and said he will propose immediate cuts in all state programs during a State of the State address that focused more on restraint than expansive new ideas.

The Republican governor used his 25-minute speech to explain to Californians why he believes the state is facing a rough budget year, blaming formulaic spending rather than economic problems.

On education, Schwarzenegger said rather than spend more money, the state should focus on overhauling 98 school districts that have fallen out of compliance with the federal No Child Left Behind Act. Rather than rely solely on state funds for infrastructure, he suggested the state should invite private companies to invest in public works projects.

STATE OF THE STATE HIGHLIGHTS
- BUDGET: The governor promised to deliver the Legislature a "difficult" budget proposal Thursday that will cut programs across the board but not raise taxes.
- BUDGET REFORM: Schwarzenegger will propose a constitutional amendment, which would go before voters in November, that he says will end the ups and downs of California's budget process. The proposal essentially would set spending levels and deposit excess revenues in good years in a rainy-day fund to cover shortfalls in bad years. The Department of Finance would establish a long-term rate of revenue growth to determine when the state should save or spend out of the fund.
- SCHOOLS: He acknowledged "this is not the year to talk about money" for schools, but proposed a plan to work with Superintendent of Public Instruction Jack O'Connell to intervene with 98 school districts out of compliance with the federal No Child Left Behind Act and make them "models of reform." California would be the first state to use the intervention powers under the federal law.
- INFRASTRUCTURE: Promised to send the Legislature a proposal to make it easier for the state to team with private enterprise to build roads and work on other public works projects.

Schwarzenegger said fiscal troubles should not undermine a universal health care plan he wants voters to approve in November if it reaches the ballot.

After winning re-election in 2006 by declaring his leadership had helped turn around California's economic fortunes, the Republican governor did not take blame Tuesday for its latest budget woes, instead blaming them on a decades-old system that relies heavily on spending formulas approved by voters.

"The problem is that, while revenues are flat, automatic formulas are increasing spending by 7.3 percent," Schwarzenegger said. "Even a booming economy can't meet that kind of increase. So the system itself is the problem."

Schwarzenegger proposed a spending cap amendment that would force the state to set aside excess money in good financial years, creating a fund that could be tapped in lean times. The proposal would require the Department of Finance to establish a long-term rate of revenue growth as a baseline to determine when the state should save or spend out of the fund.

The governor did not outline his proposed budget cuts but said he will submit a "difficult" budget Thursday that cuts spending "across the board" and does not raise taxes.

"He is selling us on the excellence of mediocrity," said Senate President Pro Tem Don Perata. "Advocating automatic cuts but failing to establish priorities and how to fund them is political expediency at its best and political leadership at its worst."

Schwarzenegger said the state's economy remains strong and that revenues will remain similar to last year, but that formulas require unsustainable spending increases. He criticized California's tax system, which relies heavily on those earning more than $119,000 a year.

"So, our whole revenue system, its ups and downs, is based on whether the rich have a good year," Schwarzenegger said. "That's no basis on which to run a government. We need more stability."

Schwarzenegger suggested he tried to fix the state's budget system in his first term but ran into roadblocks in the Legislature and at the ballot box. He said he tried and failed to persuade the Legislature in 2004 to approve a spending cap proposal.

The governor also reminded voters that they rejected his plan to do the same during the 2005 special election. That plan came under attack from labor unions and the California Teachers Association, which charged that Schwarzenegger sought to undermine the state's spending guarantee for schools.

Legislative Republicans cheered the governor's budget reform proposal, but Assemblyman Chuck DeVore, R-Irvine, noted that Schwarzenegger tried similar reform in 2005.

"And the problem was, after he was defeated with those five initiatives in November 2005, he gave up and joined the other side," DeVore said. "So this problem that we're facing this year is of his own making, with the co-conspirators being the majority Democrats in the Assembly and the Senate."