Sunday, December 21, 2008

BUDGET STANDOFF CARRIES BIG RISKS, MARGINAL REWARDS FOR CALIFORNIA GOVERNOR: Arnold Schwarzenegger is putting the state's solvency in jeopardy while seeking largely symbolic concessions.

By Evan Halper | NEWS ANALYSIS From the Los Angeles Times

December 21, 2008 -- Reporting from Sacramento — Gov. Arnold Schwarzenegger's rejection last week of the tax hikes and service cuts the Democrats rammed through the Legislature seemed frivolous to many in the Capitol: He had put the state's solvency on the line over items normally considered too marginal to derail an emergency spending plan.

But the experiments in privatization, tweaks in environmental laws and trims to state welfare programs the governor has demanded are laden with symbolism. They have been on his agenda for years. Signing a budget without them would signal capitulation to Democrats, especially at a time when whatever standing the Republican governor has left in the GOP is being undermined by his support for billions of dollars in new taxes.

"I don't see how the governor could have signed that package and saved face with the people of California," said GOP political consultant Bill Whalen.

But rejecting the plan carries big risks for Schwarzenegger. It shifts responsibility to him if things get bad enough that the government has to shut down or go into default. He must get the Democrats to blink to keep the situation from careening out of control.

The governor hit the stump Friday -- a day after spurning the latest fiscal plan -- with rhetoric that positions him to declare victory if Democratic lawmakers get on board with his proposals, even if the things he wants do little to change the Democrats' package.

At a Fresno news conference, he complained of the lawmakers' incompetence. He said they are controlled by special interests. He groused that they live lavishly on the taxpayers' dime. He called the situation in Sacramento "sad."

"They passed legislation with a whole bunch of high taxes, to punish you, as if they didn't do anything wrong -- you did something wrong," Schwarzenegger told a group of students and supporters gathered at a high school. "But they passed a whole bunch of legislation of high taxes, but no real spending cuts, no real jobs package."

The governor gave no indication that the additional cuts he is seeking amount to less than 1% of state expenses. Nor did he let on that a day earlier, he had told the Capitol press corps the tax hikes were not what stopped him from signing the Democratic package; rather, he wanted lawmakers to incorporate more of his ideas.

The governor and Democratic leaders will return to the negotiating table in coming days. The governor has said publicly that he is prepared to sign off on the $9.3 billion in higher taxes that they seek on gasoline, retail sales and oil companies. And the Democrats say they have come too far to walk away.

They used audacious legal maneuvers Thursday to sidestep a requirement that new taxes be approved by at least two-thirds of the Legislature, which would have required some support from anti-tax Republicans. They rushed their tax bills through on simple majority votes, and now all they need to put them into effect is the governor's signature.

"The silver lining is he did essentially agree with our innovative approach to increase the state's revenues," Senate Leader Darrell Steinberg (D-Sacramento) said of the governor. "Sometimes the best deals, the best arguments, the biggest accomplishments . . . have to break apart two or three times before they come together."

State Treasurer Bill Lockyer reminded reporters at a news conference Friday how high the stakes are. About 2,000 public works projects for which the state suspended funds last week will not get their money absent an agreement. Lockyer said the state simply can't sell bonds for the projects amid deep fiscal uncertainty.

A downgrade in California's credit this month leaves California with the distinction of the lowest rating in the country, on par with some developing countries.

"I think right now Wall Street is believing that California is not a place you invest in," Lockyer said. "Until these things are fixed, investors are going to stay away."

Yet Democrats are under considerable pressure not to budge, especially from unions and environmental organizations -- their support base.

Turning over to private interests the construction and maintenance of roads, schools, courthouses and other public works projects, as Schwarzenegger wants, would threaten thousands of union jobs. And easing environmental restrictions would chip away protections guaranteed by the California Environmental Quality Act, which conservationists have fought for years to protect.

Additionally, the welfare reductions the governor seeks would further fray a safety net that Democrats and organized labor have spent decades stitching together.

Some rank-and-file Democrats say the governor is exploiting a crisis. Even if their leaders ultimately strike a deal with him, there are no guarantees that the caucus will fall into line. The governor Friday ordered mass layoffs in the state workforce and unpaid furloughs for tens of thousands of state employees, irking Democrats across the board.

The Capitol standoff may feel familiar to lawmakers. The governor rejected a budget they passed in September. But he quickly signed a nearly identical document after they agreed to bolster the state's rainy day fund, a concession unlikely to have much effect on state spending until after he leaves office.

Schwarzenegger, however, had positioned himself to declare a big victory.

The governor almost appears to relish these games of chicken.

"Put the pressure on the legislators," Schwarzenegger urged the public in Fresno on Friday. "E-mail them, call them, send them cards, really bombard them."

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