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GEORGE SKELTON / CAPITOL JOURNAL

Governor's budget shows lessons learned

May 15, 2008|GEORGE SKELTON

SACRAMENTO — In Arnold Schwarzenegger's continuing education as governor, he presumably now has learned three lessons:

Lesson No. 1: Never say "never," as in "Read my lips . . ."

Lesson No. 2: Don't be afraid to flip-flop in an emergency, especially when you're not running for reelection.

Lesson No. 3: Close your ears to the simplistic mantra, "We don't have a revenue problem; we have a spending problem." Most of all, don't parrot the chant. You may wind up eating your words.

At lunchtime Wednesday, unveiling his revised state budget proposal, Schwarzenegger performed a flip-flop and ate his words.

For five years -- until a couple of months ago -- Schwarzenegger crusaded against tax increases and promised never to raise them. Running for reelection in 2006, he pummeled his Democratic opponent, Phil Angelides, as a tax-and-spender. And he has constantly recited the conservative anthem: "We don't have a revenue problem . . . "

The governor was even seen on Sacramento TV on Sunday asserting that "I am very much against raising taxes."

Could be. But on Wednesday he proposed to raise the sales tax by 1 cent on the dollar if the budget for the fiscal year beginning July 1 falls short of enough revenue to make ends meet. Never mind that he also proclaimed that his budget plan "holds the line on taxes." It holds the line only if a higher sales tax isn't deemed necessary to balance the books.

Schwarzenegger conceded he had concluded that the state's budget deficit -- projected at $15.2 billion, even without a reserve -- could not be erased "by cuts alone." He has become convinced, the governor told reporters, that there is a need for both spending cuts and higher revenue.

Give Schwarzenegger credit for the budgeting creativity he has been asking from legislators.

Schwarzenegger proposed that the state first try to generate its revenue boost from the state lottery. Under his plan, Wall Street investors would pay the state $5 billion annually for three years. Investors would recoup their $15 billion from lottery profits, plus 5.8% annual interest, over perhaps 30 years. (Education would continue to receive its $1.2-billion annual cut from the lottery.)

Administration officials immediately objected to the news media and legislators of both parties dubbing this scheme "more borrowing." Gubernatorial spokesman Aaron McLear spun it as selling off some future lottery profits.

Whatever it's called, the maneuver will need to be approved by the Legislature and then the voters in November. Voters also would have to endorse a separate budget reform package, including a rainy day fund. The money from the lottery investors would be pumped into the rainy day fund. And the rainy day fund would be used to stabilize tax revenue during economic busts.

All this may be too complicated and dicey for legislators and voters.

So Schwarzenegger proposed a backup budget-balancer that needs to be approved only by the Legislature: the sales tax hike. It would be automatically triggered if the lottery idea went nowhere -- or even if it were approved and the state still needed extra money to make ends meet.

The tax hike would terminate whenever the rainy day fund filled to capacity -- 15% of the general fund, roughly $15 billion currently -- or on June 30, 2011, whichever came first. That is, unless the next governor and Legislature extended the termination date.

Schwarzenegger borrowed the tax trigger mechanism from Republican Gov. George Deukmejian, who invented it in 1983 to cover a deficit he had just inherited from Democratic Gov. Jerry Brown, the current attorney general who's gearing up to run again for governor in 2010.

Deukmejian's deficit-reduction plan was a bit different. He also closed tax loopholes, which Schwarzenegger didn't propose Wednesday but generally has advocated in recent weeks. It's a good bet -- mega odds better than a lottery ticket -- that big loopholes will be plugged when the governor and Legislature ultimately compromise on a budget.

Deukmejian's sales tax would have been triggered if the economy didn't rebound. It did and the trigger never was pulled.

Until Wednesday, about the only thing Schwarzenegger and Dull Duke had in common was that each had a long, difficult name. In running for governor, Deukmejian indicated he'd veto any tax increase, but -- unlike Schwarzenegger -- never took the pledge.

Soon after his election, Deukmejian told a Times reporter: "I'm not one who uses the word 'never,' 'ever' or 'always.' "

That flexibility -- unlike Schwarzenegger's tax stubbornness -- allowed Deukmejian to tame the budget his first year in office.

I called Deukmejian's then-chief of staff, Steve Merksamer, and asked him to assess Schwarzenegger's trigger. "The governor has done exactly what he should have done," replied Merksamer, who runs a political lawyer/lobbying firm and has close ties to the administration.

"He's being creative and bold based on two overarching principles: Do everything you can to avoid raising taxes during a recession, and recognize that because of the dynamism of California's economy, revenues can come back just as dramatically as they went down."

Not surprisingly, there also was a different view -- especially after Schwarzenegger took a cleaver to programs for the aged, blind, disabled and welfare moms and their kids.

"This is a budget beneath a governor of this great state," declared Senate leader Don Perata (D-Oakland). "It's shameful. . . Democrats are not going to accept this budget."

But Perata did concede it was a "very cleverly drafted budget."

At this juncture, that will do. It's the governor's opening offer. There soon needs to be a legislative counteroffer.

Then Schwarzenegger hopefully will learn lesson No. 4: It's at the Capitol where tricky compromises are reached, not while performing on tour around the state.

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george.skelton@latimes.com

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