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Choose Your Weapon, Arnold


In the movies, Arnold Schwarzenegger rarely met a rival he couldn't lick. Of course, that was before he was elected governor of California in an Oct. 7 recall incited in part by the ugliest monster the 56-year-old muscle man will probably ever see: the state budget. Depending on who is doing the estimating, California will be in the red next year to the tune of $8 billion, $10 billion, or even more than $20 billion. "Every time we look, the number is different," Schwarzenegger said while meeting with the press two days after the vote. Indeed, courts are now reviewing whether the legislature could authorize selling more than $12.7 billion in bonds intended to lower that deficit to a still-gaping $8 billion. "The situation," he said, "could look a little ugly."

Boy, does it ever. That doesn't mean California's new governor won't have plenty of options for reducing the deficit. But it does mean that Schwarzenegger may have to retreat from such campaign promises as cutting taxes and boosting education spending. And it will mean making the most of Florida's budget chief Donna Arduin, who is on loan to California to conduct an audit of the state's $98.9 billion budget. Arduin, a 40-year-old, no-nonsense workaholic, helped turn around budget problems in Michigan, New York, and the Sunshine state mostly by squeezing spending and laying off government workers. In Florida, she also helped Governor Jeb Bush cut more than $6 billion in personal and business taxes.

A MASSIVE WHACK

But Arduin may have met her match with California's state finances. For starters, there's no getting around Proposition 98, which requires K-12 education expenditures to increase in proportion to the growing student population, even during years when state revenues fall. Similarly, health and welfare spending mandated by federal rules are also immune from cuts. Together, education and health care comprise about 65% of total state spending in any one year. That means Arduin will need to take a massive whack to remaining areas -- including such basic services as universities, courts, and police -- to bring spending down.

So what is there to cut? Arduin will consider merging several overlapping state agencies, including two state tax units and several that handle education programs, according to a member of her transition team. Even before his recall, Davis had asked his agencies to recommend how to cut 20% out of the $10 billion in general government spending through layoffs, outsourcing, and other measures. In all, Schwarzenegger will probably find at least $1.5 billion in such cuts, says former Senate budget staffer Fred Silva. And former Controller Kathleen Connell argues that Davis created 12 agencies, such as the Office of Inspector General, that could be scaled back.

Arnold will also find big chunks to cut from the $10.5 billion the state spends on Medi-Cal. Trimming some "optional benefits" such as acupuncture, say Senate Republicans, could save $693 million a year. An additional $100 million could come by eliminating public assistance to immigrants sponsored by U.S. citizens. Some $240 million could be saved by granting nonviolent prisoners early parole, according to proposals made by the state's Legislative Analyst's Office earlier this year. And there's another source of ready cash, according to the conservative Reason Foundation: The state could sell vacant land and unused assets.

Slicing a little deeper, Schwarzenegger and Arduin could scrutinize the $2.9 billion spent for the University of California campuses. But cuts there will mean highly unpopular tuition hikes. A new campus planned for Merced could be delayed further, but that move would overcrowd already packed lecture halls. Schwarzenegger has even mentioned the possibility of closing some state environmental protection offices, which he claims duplicate federal efforts.

These aren't easy choices, but California faces a potential cash crisis in May, especially if the court cases on its pending bond sales go against it. Ultimately, Arnold may have to do what he has vowed not to: Raise some taxes. The guv-elect got some good news when the state, citing stronger-than-anticipated individual tax receipts, said revenues so far this year are $514 million above the projected $16.1 billion. And some relatively easy options for raising more money exist. A temporary 1% sales tax hike, for example, could raise $4 billion, according to the Legislative Analyst's Office. Schwarzenegger could also get the $1.5 billion in new taxes from casinos on Indian lands that eluded Davis by renegotiating their compacts in exchange for more slot machines, according to several budget analysts.

As for Arnold's campaign pledge to eliminate the unpopular tripling of the car-registration tax, that's more difficult. It would not only cost $4 billion but also require new legislation, say lawyers for the state's Dept. of Finance.

STAR POWER, NOT GLOOM

In all of these battles, Arnold clearly has one thing going for him: He isn't the gloomy Gray Davis. Schwarzenegger has said he would take his "case to the people" and campaign for cuts the legislature won't give him. The charismatic celebrity also is likely to use his star power to try to unify the often balkanized legislature. "He will have a far better chance of getting Democrats and Republicans together than in the past," says Schwarzenegger transition member Eli Broad, a Democrat and former homebuilding tycoon who is now a leading Los Angeles philanthropist. "He would get the big four in the state legislature to agree to vote something totally up or down, and everyone would have political cover." A tough job, no doubt. But this governor has as good a chance as anyone of wrestling the evil, ugly budget monster to the ground. By Ronald Grover, with Christopher Palmeri in Los Angeles, and Katie Kerwin in Detroit


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