Gov. Arnold Schwarzenegger proposed a revised 2007-08 budget.
Gov. Arnold Schwarzenegger proposed a revised 2007-08 budget. (Associated Press)
SACRAMENTO — Gov. Arnold Schwarzenegger proposed a revised 2007-08 budget Monday that uses higher-than-expected tax revenue to ease the state deficit, bolster the state emergency fund and lower California bond debt.

The Republican governor said the $146 billion spending plan he sent lawmakers fully funds education and other priorities, "without raising taxes" or "making deep cuts to important programs."

But Senate leader Don Perata, D-Oakland, and other Democrats who dominate the Legislature, attacked the proposal as further draining $200 million from mass transit — for a total of $1 billion since the governor proposed his original budget in January.

Democrats also criticized the plan for blocking a $185million cost-of-living increase for the seniors and the disabled, receiving payments from supplementary income programs.

The January budget proposal contained controversial hikes in university tuition fees of up to 10percent and a $500 million slash in welfare rolls — aspects that were carried forward as part of the revised spending plan.

California's most vulnerable citizens remain "in the free-fire zone," Perata said.

Schwarzenegger administration officials lauded the budget for bolstering K-12 school funds by $800 million due to unexpected state tax revenues, under a complex, voter-approved funding formula.


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Administration officials also said that of unexpected revenue from taxes, more than $3 billion will be used to ease the state deficit, lower bond debt and bolster the state emergency fund. Assemblyman Guy Houston, R-San Ramon, said the governor "is showing restraint by limiting spending increases and by creating a reserve in case we have unexpected needs down the road."

Perata and Assembly Speaker Fabian Nunez, D-Los Angeles, however, predicted a lengthy budget debate this year, which means the governor and lawmakers are likely to battle well beyond the start of the fiscal year on July 1.

One of the central clashes will focus on cuts in social services.

Sen. Leland Yee, a Democrat who represents the San Francisco and Peninsula areas, said he was "disappointed to see the governor continue to cut programs for poor children, the mentally ill and the disabled."

Another of the central debates will focus on mass transit.

The California Transit Association, which represents Bay Area Rapid Transit, said diversion of even more gasoline tax funds will leave local agencies hard pressed to provide basic services.

"How does the governor propose we get transit services to the thousands of people who have no other means of getting to work, school, medical appointments or even the grocery store?" CTA Director Joshua Shaw said.

Carli Paine, of the Transportation and Land Use Coalition in Oakland, added, "We have to make commitment to funding quality, dependable public transit."

A clash over the overall proposed budget may divert attention from Schwarzenegger's ambitious reform agenda this year, including an overhaul of the prison and health care systems.

East Bay analysts agreed with Democratic leaders that budget approval could well be delayed.

"I don't see how he thinks he can get this kind of budget strategy approved from a Democrat-controlled Legislature. We've seen these sorts of proposals from Schwarzenegger before. Democrats have protested against them before. It's the same old stuff," said Melissa Michelson, a political science professor at California State University, East Bay.

"It's almost like they're reading from the same old script," she said. "It's exactly the behavior that makes Californians so cynical."

Democrats, and some Republicans, criticized the absence of budget reform — an overhaul of the way the state takes in money and spends it.

They said California's fiscal system is flawed, cheating taxpayers in the way revenues are collected and earmarking most of the money for specific uses, leaving officials little flexibility.

The revised state budget, while calling for slightly more spending than in January, may be affected by a wild card — the state's soft housing market is expected to depress tax revenue in the coming year. 

In his speech, Schwarzenegger again promoted his plan to privatize the state lottery for an up-front payment of tens of billions of dollars that could be used primarily to pay down California's bond debt.

The proposal is not tied to the coming fiscal year's budget.

During questioning, the governor acknowledged for the first time that his plan might have to go to voters, who originally approved a state-run lottery. But Schwarzenegger said he expected Californians would back the idea.

"If they decide that we need to have the people vote on it, we just put it on the ballot and let the people decide," Schwarzenegger said.

"I think the people will go for it," he said. "I'm not worried about that at all."

If the windfall ever comes, Democrats said, there would be better uses for it than Schwarzenegger's idea of using it mostly to pay down California's debt.

California, for instance, faces a growing, multibillion-dollar deficit in its pension fund, they said.

Treasurer Bill Lockyer said the lottery-sale idea is "worth considering" but that it could easily turn into a "budget gimmick."

The former East Bay politician said that "before turning over the lottery to private entities and losing the annual revenue stream, policymakers should address the question of whether the state can do more on its own to strengthen the operation, increase its revenues and enhance its public support."

In a couple of one-time twists, the governor proposed selling for $1 billion the EdFund, a nonprofit, public-private partnership that provides student loans. He also wants to shift $600 million from a tobacco settlement reserve fund into the state's general fund.

The proposal would leave the state with a $1.4 billion "net operating deficit" for the coming fiscal year. But Schwarzenegger noted that, without raising taxes, he has pared down the $16.5 billion deficit he inherited in 2003.