SAN FRANCISCO — Faced with a massive budget deficit, California Gov. Arnold Schwarzenegger takes center stage next week for two annual fixtures that give him the opportunity to lay out his plans and objectives during what promises to be a challenging 2008. Schwarzenegger already has said he will declare a fiscal emergency as allowed under a 2004 ballot initiative, and some analysts hope that will force lawmakers to be more proactive in coming to grips with the ballooning deficit sooner. The Republican governor also is expected to push for the use of public-private partnerships to tackle transportation and other infrastructure projects. Schwarzenegger is still trying to achieve major policy objectives in the areas of health insurance and state water planning, but he faces a fiscal 2009 general fund budget deficit that has been projected at between $10 billion and $14 billion should nothing be done about it. The governor gets to make his case at length Tuesday night, during his state of the state address, which will be followed Thursday with his fiscal 2009 budget proposal. “It’s a speech I wouldn’t want to write,” said Barbara O’Connor, director of the Institute for the Study of Politics and Media at California State University, Sacramento. The deficit threatens to overwhelm the other issues. In California, it’s difficult to get a budget approved at the best of times, because passage requires a two-thirds vote from each house of the Legislature, meaning votes are required from at least some members of both parties. Republican lawmakers have already said they won’t vote to increase taxes. The majority Democrats have said they will fight to protect spending programs they support. The budget deficit cycle has repeated itself several times in the last 20 years, said Dick Larkin, municipal analyst at J.B. Hanauer & Co. So far, he said, the situation doesn’t appear as dire as it was in 2002, when the state controller’s office began issuing billions of dollars in warrants to keep cash flowing from one fiscal year to the next. “I don’t think it’s going to be a situation where the reserves are going to be so low” as to require external borrowing, Larkin said. “They may have to do some internal borrowing come June.”One thing will be different in this year’s budget crisis. When he issues his 2009 budget proposal Thursday, Schwarzenegger will also declare a fiscal emergency. It will be the first time that power has been invoked since it was created by a 2004 ballot measure that was a companion to the $15 billion deficit bond authorization that bailed the state government out of its last budget crisis. The emergency declaration will start a special session of the Legislature, and the governor will introduce bills to correct the current-year budget shortfall. Lawmakers will have 45 days to approve such legislation. If they don’t, they are prohibited from moving forward on other legislation, and also prohibited from adjourning the special session. “They, and we, will have to stay on this until it gets done,” said H.D. Palmer, spokesman for the governor’s Finance Department. “We’re going to be operating on a very tight timetable.”The new emergency powers offer a glimmer of hope that California won’t repeat its past budget deficit cycles, according to Larkin. “In the past, when the state’s had a revenue shortfall mid-year they just let it burn and figured they’d deal with it next year, and that’s part of the problem,” he said. “That’s been the pattern. This new law might break it. This might be the first time California gets into a deep revenue shortfall and they’re able to put the brakes on in time.” The inability of lawmakers to come to grips with the state’s budget problems has taken a toll on California’s bond rating in recent years, driving it to low investment-grade levels and raising the cost of borrowing. Recent upgrades have brought California’s rating back to the A-plus level, but that is still considered a very low rating for a state. Schwarzenegger has already said he plans to announce a major public-private partnerships initiative during the state of the state address. The governor has backed P3 initiatives throughout his administration, with little legislative success. Lately he has taken to calling his version of P3s “performance-based infrastructure,” or PBI. Since they doesn’t require much upfront spending, P3 projects should be a major talking point for Schwarzenegger in a year when deficit finances are likely to dominate the headlines. “The challenge, of course, is to look like you’re going forward when you have a $14 billion deficit,” O’Connor said. The governor is also pushing for action on a health care reform plan designed to provide universal health insurance by requiring residents to obtain insurance, while subsidizing the policies for poorer residents. A reform bill has passed the Assembly, but Senate President Pro Tem Don Perata, D-Oakland, while saying he supports the concept, has said he wants to see a report from the nonpartisan Legislative Analyst’s Office before he allows a vote. Even if the Senate approves it, voters in November will have to approve a tax-and fee package to finance the plan, which would have a substantial impact on California hospitals. The governor and Perata have also been at loggerheads over a water bond package, because Schwarzenegger wants it to include funding for dams and Perata doesn’t. It’s all a tall order, but O’Connor said the governor shouldn’t be counted out. “The sheer force of his personality often has a salutary effect,” she said. Perata and Assembly Speaker Fabian Nunez, D-Los Angeles, have become familiar negotiating partners for the governor, but both men face a possible turning point in their political careers this year. The state’s voters will weigh in Feb. 5 on a ballot measure that will reshape the state’s term limits laws. The ballot measure would allow lawmakers to serve a total of 12 years in the Legislature, all in one house. The current laws permit 14 total years of service, with a maximum of eight in the Senate and six in the Assembly. If Proposition 93 fails, Perata and Nunez will be termed out at the end of this year — and they will become lame ducks immediately.

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