California faces its day of fiscal reckoning

[May 23, 2009]  SACRAMENTO, Calif. (AP) -- The day of reckoning that California has been warned about for years has arrived.

 The longest recession in generations and the defeat this week of a package of budget-balancing ballot measures are expected to lead to state spending cuts so deep and so painful that they could rewrite the social contract between California and its citizens. They could also force a fundamental rethinking of the proper role of government in the Golden State.

"The voters are getting what they asked for, but I'm not sure at the end of the day they're going to like what they asked for," said Jim Earp, executive director of the California Alliance for Jobs, which represents the hard-hit construction industry. "I think we've crossed a threshold in many ways."

California is looking at a budget deficit projected at more than $24 billion when the new fiscal year starts in July. That is more than one-quarter of the state's general fund.

This week, voters said they no longer want the Legislature to balance budgets with higher taxes, complicated transfer schemes or borrowing that pushes California's financial problems off into the distant future. In light of that, Republican Gov. Arnold Schwarzenegger has made it clear he intends to close the gap almost entirely through drastic spending cuts.

The governor's cutbacks could include ending the state's main welfare program for the poor, eliminating health coverage for about 1.5 million poor children, halting cash grants for about 77,000 college students, shortening the school year by seven days, laying off thousands of state workers and teachers, slashing money for state parks and releasing thousands of prisoners before their sentences are finished.

"I understand that these cuts are very painful and they affect real lives," Schwarzenegger said. "This is the harsh reality and the reality that we face. Sacramento is not Washington - we cannot print our own money. We can only spend what we have."

He also has advocated selling state assets to raise cash, including the Los Angeles Memorial Coliseum and San Quentin State Prison.

The Democrats who control the Legislature do not want major spending cuts, but so far they don't have a plan for closing the deficit. And if their solution is higher taxes and more borrowing, they will probably not have enough Republican votes to get the two-thirds approval needed for passage.

The crisis is a sort of political comeuppance for Schwarzenegger, who took over a state with a projected $16 billion gap in 2003 and promised to end California's "crazy deficit spending."

The gap has two primary causes: The state has been living beyond its means for years by spending generously on all sorts of programs that the voters, the politicians and the special interests wanted. And the recession has hammered California's economy.

Personal income declined this year for the first time since 1938 and unemployment is 11 percent, one of the highest rates in the nation. Nearly $13 billion in tax increases and $15 billion in cuts enacted earlier this year, as well as billions in federal stimulus money, have not been enough to make up for the drop-off in revenue.

"This is the year everything has fallen apart," said outgoing Assembly Minority Leader Mike Villines, a Republican from the Central Valley. "We don't have an alternative. We're literally at the day of reckoning and have to cut it all out."

The drastic cuts that appear to lie ahead will, by accident, accomplish the stark reduction in state government that many Republicans have long advocated.

"We should have been limiting the growth of government for years," Villines said.

The crisis also has prompted talk of a complete overhaul of the way California government operates.

A group of business leaders and good-government groups has begun the process of calling for a convention to rewrite the California Constitution.

A separate commission is expected to release a proposal to rework the state's tax structure, which is vulnerable to booms and busts in California's economy because it relies heavily on high-income earners. The state also has few limits on what state government can spend and a small rainy day fund that can easily be raided by the politicians.

Former Assembly Speaker Bob Hertzberg, a Democrat who has joined a group seeking to change the state's budget system, said too many services that used to be performed by local governments have been taken over by the state because of a landmark 1978 ballot measure that drastically limited property tax revenue. Hertzberg said the programs, and the money, need to be sent back to counties and cities.

"The real problem of California is that we need to bring government closer to the people, so that the role of the state is much narrower. We need to focus on big-picture stuff," he said.

In the near term, the huge cuts that are about to hit will probably affect nearly every one of the state's 38 million residents. Schwarzenegger's latest budget proposal, for example, would eliminate health care coverage for more than 2 million people, about 1.5 million of them children, said Anthony Wright, executive director of Health Access California.

"It would place their families in financial jeopardy for any ailment, injury," he said. "A child won't be able to see a dentist if they have a toothache or see a doctor if they don't have the ability to see the blackboard at school."

The state also faces a related problem: Every year, California borrows money on the bond market to cover its day-to-day expenses and pays it back when tax receipts flow in. But the tight credit market and questions about California's ability to repay its obligations could make borrowing difficult or extremely expensive this fall.

Schwarzenegger and some Democratic lawmakers have asked the Obama administration for a federal loan guarantee - or what some are calling a bailout. The move would be virtually unprecedented and would require the approval of a reluctant Congress.

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Associated Press Writers Judy Lin, Tom Verdin and Samantha Young contributed to this report.

[Associated Press; By JULIET WILLIAMS]

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