This is a partial transcript of Special Report with Brit Hume, August 18, that has been edited for clarity. Click here to order the complete transcript.

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BRIT HUME, HOST: Not only, as we've heard, is the pressure on Arnold Schwarzenegger (search) to get out and campaign, the pressure is also on him to renounce new taxes as a solution to California's nearly $40 billion budget deficit. Which raises the question of how California got into this situation and whether there's any way to retrace those steps to get out.

For answers, we turn to Bruce Cain, political science professor at the University of California at Berkeley. Prof, welcome.

BRUCE CAIN, PROFESSOR, UNIV. OF CA, BERKELEY: Good afternoon.

HUME: You hear Arnold is being called upon to renounce new taxes. Warren Buffett (search), his newly acquired adviser on such matters, has said of California's property tax situation, a circumstance that 'in effect, it makes no sense.' Is it possible, in your view, for California to get out of the fiscal situation it's in with this big deficit without new taxes?

CAIN: I think most people in California, political scientist and economists believe not, that there just isn't enough waste in state government spending to make up the deficit. I mean you have $38 billion. And the fact of the matter is that a lot of the spending increase went into K through 12 education, which was badly in need of funding...

HUME: Right. But obviously there was some fairly serious spending done during the good times that raised the level of spending to something of what it is now.

CAIN: Absolutely.

HUME: Why can that not be rolled back? I gather there are both legal and political reasons for that.

CAIN: There are legal and political reasons. I mean the legal reason is that a good amount of the spending in California is on autopilot. That is, we pass initiative that is say a certain fraction of the money must go to something like education. For example, 40 percent of our budget goes to education, 36 is the minimum that you can spend on education that's mandated in the constitution...

HUME: So, you're going to...cutting to the bone there would mean you could only cut, what, four points...

CAIN: Cut around education. You couldn't cut education; you'd have to cut around education. And there are other such mandated expenditures as well. So you have got a problem in terms of what exactly you have discretion over in terms of what you can cut.

HUME: What percentage of the budget, in your estimate, would be money that's...that could be tackled, discretionary spending that's not held in place by a voter mandate?

CAIN: You can basically cut some of the state agencies and you can cut some of the local spending. So, you could be talking about a third but a lot of...

HUME: A third of the deficit?

CAIN: Yes. I mean you could probab...you could probably get about half of the deficit if you are really ready to deal with serious cutting. You can't get all the deficit with cutting, without closing the University of California and basically taking away a lot of the funds that local government gets from the state. And a lot of those services: police, fire, you know, roads, et cetera, are things that people want. I mean the basic problem is that this is not a high-spending state. We're about in the middle in terms of our total state and local spending.

HUME: By what measure, you are talking about the percentage of the state's GDP or what?

CAIN: You can do it in terms of personal income; you can do it in terms of real terms, in terms of per capital. Any way you measure it, we're about in the middle. and our spending on schools was below the average and we felt we needed to spend more. Over half of the increase that you were talking about, Brit, went to K through 12. The rest went to Medical and higher education.

HUME: Now Medical is quite a generous program.

CAIN: Yes.

HUME: And what is that...what is that worth in terms of money that might be recovered there if it's possible to even do so?

CAIN: Well, my memory is, I think we increased medical by about $7 or $8 billion. So you could...some of that...

HUME: You can roll that back, maybe?

CAIN: You can roll that back. A lot of that, though, is what we call workload. Remember that our population continues to grow and so we have more people in the indigent category that were eligible for those services. So part of the problem is that we continue to grow and we have to pay for some of the dependents.

HUME: Let's assume for the sake of discussion that the economy out there begins to pick up again. And presumably you would be able to cover some of this gap with some increases in revenue that would flow naturally without a tax increase.

CAIN: Exactly, Brit. And that...

HUME: How much do you think, roughly?

CAIN: You know if we get back on to our normal revenue growth, it is quite possible that we would, you know, make up maybe $20 billion of that. I mean we've had...that's what happened to us in the early 1990s. In the early 1990s, we basically had four years in a row where we didn't have enough revenue to cover all of our expenditures. Then we got to the late 1990s and we had huge surpluses.

And as you say...

HUME: They got spent, right?

CAIN: That's right. And half of that increase occurred under Gray Davis' (search) watch because those were the periods when we had the most amount of revenue coming in. But as I said, most of that money went through K through 12 education and to Medical.

And the question is do you want to cut back on services to the poor? The Democrats say no. Do you want to cut back to schools? Well, both Democrats and Republican legislators represent districts where people don't want to have school expenditures cut.

HUME: So the only...so you're talking...under best-case scenario of a roughly $40 billion deficit, you might get $20 billion covered by normal...by growth in the natural growth and revenue. You would have to work hard, but you probably couldn't get, what do you guess, 10, 15 more by really, really ardent spending cutting?

CAIN: Well, some people say $7 billion. I think a lot of the Republicans believe that it's more like 10. So, given it's the outside number, even you can get to $10 billion...

HUME: So you're still looking at another $10 billion you have to find somewhere.

CAIN: Right. And that's assuming the economic recovery happens pretty quickly, because it took four year for us to get back into you know, having surpluses again when we had the recession in the early '90s.

HUME: Kind of makes you wonder whether anybody would want this job.

CAIN: Exactly.

HUME: Professor, thank you very much for coming. I appreciate it very much.

CAIN: Sure.

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