By HOWARD FINE
It’s being called the mother of all state government battles.
By calling for massive budget and government changes,and by threatening to take his proposals to the people if needed,Gov. Arnold Schwarzenegger has triggered the biggest political scramble in decades over how California should be run.
Republicans and business interests are lining up behind the governor. Democrats and their labor allies are preparing their own proposals to present, both in the Legislature and possibly later to voters.
“I’ve never seen anything quite like this in the 35 years I’ve been up here,” said Barbara O’Connor, director of the Center for the Study of Politics and the Media at California State University, Sacramento. “There are war rooms everywhere up here. Everyone’s got their wagons circling.”
At the center is Schwarzenegger and his bid to overhaul the redistricting process and rein in spending.
Proposals include: across-the-board cuts that take effect once spending exceeds revenues; reducing government contributions to public employee pension plans; and re-examining spending mod- els that have built-in cost escalators.
“Balancing this year’s budget is the sideshow. The real show is over these structural reforms, taking on the powerful interests in Sacramento,” said Republican political consultant Allan Hoffenblum.
Schwarzenegger’s strategy is three-fold.
First comes this year’s budget talks with the Legislature to address the projected $8 billion budget deficit. Those promise to be contentious, especially since Schwarz-
enegger has incensed teachers’ unions and others with lower-than-expected allocations.
Next is the concurrent special legislative session the governor convened last week to consider his reforms. In what could be an important tactical edge, laws passed during this special session would take effect sooner than they would otherwise.
If the governor isn’t satisfied with what emerges, his last step would be to call for a special election to consider redistricting, budget and other reforms.
Schwarzenegger has two key edges: his record popularity and his ability to persuade voters to side with him on ballot measures.
“This is the first time I’ve seen in decades where there is such an imbalance of power,” Hoffenblum said. “Former Gov. Pete Wilson wanted to do this, but he never had this much influence. Not even (former Gov. Ronald) Reagan had this much influence.”
But Schwarzenegger must watch his right flank. Conservative elements in his own party rebelled last year over his willingness to cut a budget deal with Democrats. They could do so again.
“Schwarzenegger can’t afford to ignore them if he wants to run for re-election next year,” said Bruce Cain, director of the Institute of Governmental Studies at the University of California, Berkeley. “He has never had to run in a Republican primary before and the conservatives have their eye on him. They think he’s a RINO (Republican in name only).”
Democrats, meanwhile, are trying to keep their relevance. While they’re not taking the politically unpopular step of calling for tax increases, they are preparing their own counterproposals.
Assembly Speaker Fabian Nu & #324;ez last week said he intends to introduce legislation to close what he calls corporate tax loopholes.
While Nu & #324;ez said he is willing to work with Schwarzenegger on addressing the structural budget deficit, the Democrats aren’t likely to agree to Schwarzenegger’s key proposal to rein in spending: the authority to implement across-the-board cuts.
“They definitely will not cede budget authority to the governor or to the state controller,” said Sherry Bebitch Jeffe, senior scholar at the School of Policy, Planning and Development at the University of Southern California.
Democrats also are unlikely to yield to Schwarzenegger’s call for public pension reform, especially a proposal to switch from a defined benefit to a 401(k)-style plan. Public employee unions, a key pillar of support for Democrats, are up in arms on this one.
The key question for Democrats is whether they will try to cut deals with Schwarzenegger or face off at the ballot box with their own proposals, including raising the minimum wage, expanding healthcare coverage for workers and taxing wealthy Californians to fund programs.
“If competing structural reforms make it onto the ballot, it’s hard to say who wins this right now,” Cain said. That also would make for yet another round of expensive ad campaigns, on top of the $100 million-plus spent on initiatives in November.
The unpredictability itself can carry several consequences. First, it means that even if the 2005-06 budget succeeds in reducing the deficit, bond rating agencies aren’t likely to boost the state’s “A” credit rating, the lowest among the 50 states.
Raising the credit rating would save the state hundreds of millions of dollars in bond interest payments every year.
“The reason why California has such a low rating now is twofold: The state has made little headway in reducing its structural deficit and there is so much uncertainty from year to year on the budget,” said Steve Zimmerman, managing director of Standard & Poor’s Western region office in San Francisco. “Don’t forget, looming on the horizon next year is an even bigger deficit once the deficit financing bonds are exhausted.”
Zimmerman and other bond rating analysts say that Schwarzenegger’s proposal for the authority to go back into a budget in mid-year and make cuts if spending exceeds revenues is essential.
“California has in the past had trouble making these mid-year budget adjustments,” he said, “which only makes the next year’s budget deficit that much worse.”
Fine is a staff writer with the Los Angeles Business Journal.
