Schwarzenegger to Swing Big Ax on Budget

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Saddled with a shortfall of at least $14 billion and a promise not to raise taxes, Gov. Arnold Schwarzenegger (search) is likely to release a budget next week with few surprises — it will contain cuts, cuts and more cuts.

While the administration has released no details of the 2004-2005 spending plan, lawmakers and lobbyists engaged in budget negotiations with the governor say they expect to see a painful list of spending reductions that reach every corner of the state bureaucracy.

Topping the list will likely be public health and welfare programs — especially Medi-Cal (search), the state's health insurance for the poor and disabled that costs more than $10 billion a year.

Education is also expected to share the burden, despite Schwarzenegger's campaign promise to protect school funding.

He is likely to renew his pledge to get a bigger share of Indian gambling profits, and his call for new concessions from labor unions. And there are hints of reforms and reorganizations aimed at making the state more efficient and cost conscious — including changes in parole and inmate supervision.

The new governor's finance director, Donna Arduin (search), is known for cutting billions in social services in Florida as budget director for Gov. Jeb Bush.

Tempering all the bad news, however, the governor is expected to paint a rosy economic outlook where billions of dollars in unanticipated tax revenue over the next year will let him sidestep some of the most difficult funding choices.

And there are no expectations of any new taxes.

"I think the governor has been fairly clear about that," said H.D. Palmer, spokesman for the governor's Finance Department, although there have been no similar promises when it comes to raising fees. "The plan is to control spending."

Still riding a wave of popularity since winning office in October's historic recall election, Schwarzenegger takes over at a critical time.

While former Gov. Gray Davis and the Legislature took some steps last year to solve the state's financial problems, spending remains badly out of balance with income.

Last summer's budget agreement used a long list of one-time savings, accounting gimmicks and borrowing to make ends meet. The one-time savings and many of the gimmicks expire at the end of this fiscal year, and analysts say a new deficit will begin growing almost immediately that will exceed $10 billion by June 2005.

One of Schwarzenegger's first moves as governor, repealing a tripling of the car tax, has also added $4 billion to the deficit.

Looming on the horizon is another multibillion-dollar problem. Last summer's budget agreement included $12.6 billion in loans that have been held up by legal challenge because the debt was not approved by voters.

Schwarzenegger and the Legislature agreed last month to put a $15 billion bond measure on the March ballot. If voters do not agree to the borrowing, the state could quickly find itself in an unprecedented fiscal crisis, forcing force the governor to drastically revise his budget priorities and promises.

But the governor's upcoming budget, to be unveiled Jan. 9, is expected to assume that voters approve the big bond measure, which means the problem is $14 billion — still big enough to require cuts in all areas of the budget.

His most significant move is expected to be a proposal to trim several billion dollars from schools.

Under the complex formulas that define education funding, public schools could command a $4 billion increase in funding next year, said Kevin Gordon, executive director of the California Association of School Business Officials.

But Schwarzenegger is likely to offer only a portion of that increase, said Gordon, who met with the governor and other education officials behind closed doors last week.

If the move is made, but schools still get enough to deal with growing enrollments and inflation, Gordon suspects teachers and education officials might go along.

"The dilemma facing the education community is, how do you not sit down and cooperate, given the magnitude of the problem," Gordon said. "Their objective is not to inflict any further cuts to schools and if so, I think we can walk away satisfied."

Anthony Wright, executive director of Health Access, a coalition of health care advocates, said he has had not direct contact with the administration on the budget, but through his network of sources has concluded that public health programs are on the chopping block.

"If you are going to make serious cuts and you are not going to raise taxes, you don't have many options," he said.

The biggest target, he said, will likely be Medi-Cal. As Davis proposed last year, Wright believes Schwarzenegger will look to limit enrollment in the program to slow the growth. He is likely to try to trim the number of patients by changing eligibility rules, cut reimbursements to doctors and hospitals, and reduce the kinds of services for which the state will pay.

To get his agenda approved, Schwarzenegger will need to walk a thin line between Democrats who control both houses and Republicans who have enough votes to block any proposed agreement.

The acrimony that has marked budget negotiations over the past three years is not expected to disappear, although key party leaders say they believe voters' decision to replace Davis with Schwarzenegger this fall sent them a message to end political gridlock.

Still, Democrats say there will be a limit to how much they will cut.

"We know there will be cuts, we know there will be pain," said incoming Assembly Speaker Fabian Nunez, a Democrat from Los Angeles. "What we want to make sure is that those cuts don't turn pain into shame."