SAN FRANCISCO — With the state facing a potential $14 billion deficit, California Gov. Arnold Schwarzenegger is taking another swing at enacting budget reforms.

The governor unveiled his latest budget reform proposal during his state of the state address Tuesday, saying the looming deficit demonstrates the need for reform. That’s why he expects it will fare better than previous plans that died either in the Legislature or at the ballot box.

“We now have no way out, except to face our budget demons,” Schwarzenegger said.

The reform proposal has two elements.

The first is a “revenue stabilization fund,” essentially a rainy-day fund that will automatically sequester excess revenues when they come in above budget projections. That money would be held in the reserve and transferred to the general fund during years when revenues come in below projections.

The second element would require spending cuts if the Department of Finance projects a year-end deficit, and require the Legislature to enact a statute in advance saying how such cuts would be distributed. If they fail to do so, the governor would have discretion to waive state laws and regulation to balance the budget.

“It’s based on an analysis of history,” Schwarzenegger’s finance director, Mike Genest, told reporters. “Our state’s budget history tends to have two kinds of problems: we tend to spend all we have in good years, raising the base; and we don’t cut back spending fast enough. This proposal is to fix those two concepts.”

The Republican governor will unveil his fiscal 2009 budget proposal this morning, which is expected to include cuts to many ongoing programs. It won’t have any tax increases, Schwarzenegger said.

He will exercise his authority to declare a fiscal emergency, which essentially allows him to ask lawmakers for mid-year spending cuts, and requires them to stop work on other bills if some solution isn’t found. It’s unclear how the fiscal emergency declaration will play out, as it has never been invoked before.

The Democrats who control both chambers of the Legislature signaled that they haven’t bought into the governor’s budget priorities.

“The governor’s new vision is to make yesterday our future,” Senate president pro tempore Don Perata said during the official Democratic response to the state of the state speech, made jointly by Perata and Assembly Speaker Fabian Nunez.

“Clearly, cuts alone won’t fix things,” Nunez said.

Many Republicans, however, liked what they heard.

“That appears to be the only way fiscal discipline will be accomplished — enforcement by the people through a constitutional amendment,” said Dennis Hollingsworth, ranking Republican on the Senate Budget Committee.

After a recent bust-and-boom cycle, California’s bond ratings have settled at the A-plus level.

JB Hanauer & Co. credit analyst Dick Larkin said the reserve proposal appears to be a good idea, given the state’s historic budget cyclicality.

“I would say that a formal revenue stabilization fund, sized large enough to effectively deal with the state’s wild revenue swings — but also with tough rules on not appropriating and spending it without meeting some strong criteria tied to revenue shortfalls — would be absolutely necessary if the state ever hopes to see the Aa/AA bond rating category,” he said in an e-mail.

In his state of the state speech, Schwarzenegger also reiterated his support for a universal health insurance plan based on individual mandates, as well as previously announced plans to expand state and local government authority to enter into public-private partnerships for infrastructure.


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