Schwarzenegger can't terminate California money woes

SAN FRANCISCO (Reuters) - Staving off California's financial meltdown will be the toughest role ever for Hollywood hero Arnold Schwarzenegger as he enters the last 18 months of his governorship.

The most populous and often trend-setting U.S. state has racked up a $26.3 billion budget gap -- about a quarter of its total annual spending -- and could run out of cash this month if its books are not balanced.

Financial woes in California, home to both Hollywood and high-tech hub Silicon Valley, are so severe that some state officials have begged Washington for financial aid.

The state is resorting to issuing "IOU" notes to preserve its dwindling cash -- essentially promises to pay money owed to vendors and local agencies, including ones overseeing health programs and financial aid to the elderly, the blind and college students.

The vast majority of U.S. states face budget shortfalls as the economy crumbles, and nearly half also have divided rule, where control over the governorship and legislature is split between the Democratic and Republican parties.

Short on cash despite boasting the world's eighth-largest economy, California stands alone in the extent of its fiscal turmoil and the complexity of its government.

"All states are unique, but California is more unique," said Tim Storey, an analyst with the National Conference of State Legislatures.

Schwarzenegger, a Republican, is best remembered from Hollywood as a human-killing Terminator machine but he came into office promising to bring stability to the state's finances. It hasn't worked.

"Schwarzenegger is the third consecutive governor who has tried to govern from the center and has ended up fighting with the base of his own party just as much as with members of the opposition," said Dan Schnur, director of the Unruh Institute of Politics at the University of Southern California.

COMPLEX BUDGET

California's budget system is Byzantine in complexity.

"We've created the strongest possible disincentive toward any bipartisan cooperation or compromise," Schnur said.

Partisanship in the legislature peaks during budget negotiations and the current talks are especially tense because state revenues are suffering their worst slump since the Great Depression.

Democrats, who control both houses, are having to accept painful spending cuts but hold out hope for tax increases to help offset them. Republicans are again ruling out tax increases and the governor has swung behind them.

Spending cuts will fall hard on state workers -- some losing jobs and others losing pay through furloughs -- and on recipients of state aid, including local government agencies already stretched by rising jobless and homeless rates.

The ideological rift between the parties is not unique but most states allow a simple majority to pass a budget, so compromise is not needed, said Thad Kousser, a political scientist at the University of California, San Diego.

Almost uniquely, California requires budgets and tax increases be approved by two-thirds majorities, which fail to coalesce in California's capital Sacramento each year.

Republican Tom Campbell, a former budget director for Schwarzenegger who is now running for governor himself, blames term limits for creating a cadre of legislators who think about the short term -- and fail to save for rainy days.

"The legislature seems to be unable to spend less than the revenue available in any year," he said, arguing that the governor should leave the budget exclusively to the legislature and then use a line-item veto to shrink it to size.

The way California is split into legislative districts gives ideologues an advantage and the state has some of the toughest requirements for bipartisan budget support in the country. It also sets no limits on spending growth and has a boom-and-bust tax structure based on income tax.

One of Schwarzenegger's key victories has been a reform that will put the job of drawing legislative districts in the hands of a panel of voters after each U.S. census, beginning with the 2010 census. Previously, lawmakers drew the district lines and the results polarized the legislature.

Analysts expect the panel to help moderates from both parties enter the legislature. "If you have 15 or 20 members from competitive districts you've created an ideological center with which a governor can work," Schnur said.

Moderates might bear down on California's budget.

"Competitive districts will make people (lawmakers) more focused on solutions than speeches," said Douglas Johnson, a fellow at the Rose Institute of State and Local Government at Claremont McKenna College.

For a package of Reuters stories on the budget crisis hitting U.S. states and cities, please double-click on: here

(Editing by Howard Goller and James Dalgleish)