SACRAMENTO — After promising to fix the state's financial mess without raising taxes, Gov. Arnold Schwarzenegger faces a reckoning this week with his release of a 2004-05 budget that attempts to close a multibillion-dollar shortfall through deep, politically divisive spending cuts.
Schwarzenegger will deliver his first State of the State address Tuesday in the Assembly chamber, where he is expected to champion job creation and economic development but also promote March ballot measures that would authorize $15 billion in borrowing while imposing a limit on future state spending.
Three days later, he will unveil his budget for the fiscal year that begins in July.
Until now, Schwarzenegger has largely put off questions about how he will square state spending with revenues and end the crippling budget deficits of recent years. At a news conference Dec. 18, he declined to say how he would reimburse cities and counties for the $4 billion they lost when he cut the vehicle license fee. "We will have plenty of time to talk about it," he said.
That discussion starts this week.
So far, the governor's office has released few details about the new budget. But the contours of Schwarzenegger's plan emerged in interviews last week with administration officials and people close to the governor.
While fee increases are in, they've it made clear that a tax hike is out. And while signs of an economic recovery are encouraging, rising tax revenues alone won't be enough to close a projected $14-billion shortfall in the next fiscal year, the governor's aides say.
"Nobody should be lulled into a sense that we're going to be able to grow out of this problem," said H.D. Palmer, a spokesman for the governor's finance department.
All of which leaves one remaining budget-balancing tool: spending cuts. Even Schwarzenegger has flinched at some of the reductions that he put forward to close this year's budget gap, worrying that poor and sick Californians would be deprived of essential services. But there are few alternatives in the absence of a tax increase, financial experts say.
"I don't believe you can bridge a gap of that magnitude without either a very substantial tax increase or making spending cuts that will have a very real impact on Californians' lives," said Jean Ross, executive director of the California Budget Project.
Serious though the problem may be, the numbers are not as worrisome as last year, when the state faced a $38-billion deficit under then-Gov. Gray Davis. Ultimately, the Legislature avoided dramatic spending reductions through heavy borrowing and reliance on increasing the vehicle license fee.
But Schwarzenegger must follow a tougher path. He is already proposing to borrow $15 billion -- most of it to cover past deficit spending -- which would leave a hole of about $10 billion in the 2004-05 budget. He made his challenge harder still when he rolled back the license fee.
A healthier economy and the prospect of more revenue from the federal government and from Indian casinos might pull in several billion dollars more. But that won't close the gap. Schwarzenegger will be compelled to cut billions to bring the budget into balance.
The governor's choices are limited. Because of voter-backed initiatives, constitutional mandates and contractual obligations, as much as three-fourths of the state's $100-billion budget can't be touched, Ross said. Within the narrow slice of the pie over which he has discretion, Schwarzenegger is expected to call on lawmakers to cut spending on state programs such as Medi-Cal and Healthy Families, along with prisons, colleges and universities.
"Virtually every aspect of state government is going to be asked to shoulder part of the savings and sacrifice to get our fiscal house in order," Palmer said.
Healthy Families is a program that offers health care to children of the working poor. The joint federal-state program insures about 700,000 children, with an additional 300,000 eligible but not enrolled.
Palmer said the governor's budget would limit access to Healthy Families, thereby controlling the caseload and slowing the growth in spending -- a plan that tracks the midyear budget reductions Schwarzenegger released in November.
As a candidate for governor, Schwarzenegger praised the program and did not want to oust those already enrolled in it, Palmer said. But the enrollment cap would deny coverage for new children until others leave.
Cuts to local governments are also expected. Schwarzenegger recently won widespread praise in cities and counties for promising to replace the lost license-fee money. But in a tight budget year, said one Schwarzenegger aide, "local governments are back on the block."
The University of California and the California State University systems both face another round of cuts that could trigger an increase in fees and new limits on enrollment.