Analysis: Schwarzenegger's last budget stand looks doomed

SAN FRANCISCO Fri Dec 3, 2010 8:03am EST

Current California Govermor Arnold Schwarzenegger gestures during his appearance at the Women's Conference 2010 in Long Beach, California, October 26, 2010. REUTERS/Mario Anzuoni

Current California Govermor Arnold Schwarzenegger gestures during his appearance at the Women's Conference 2010 in Long Beach, California, October 26, 2010.

Credit: Reuters/Mario Anzuoni

SAN FRANCISCO (Reuters) - California Governor Arnold Schwarzenegger's lame-duck bid to resolve the state's budget problems in a special session next week has little chance of success, but he is probably doing his successor a favor whatever the result.

Governor-elect Jerry Brown promised to begin budget talks with legislators even before taking office January 3, but Schwarzenegger's 11th-hour attempt is hardly likely to upstage Brown, who will hold talks of his own while the legislature is in session.

Any progress by Schwarzenegger in fighting the mounting deficit would only make life easier for the incoming governor, while gridlock might humble legislators who now find voters won't tolerate their smoke-and-mirrors tactics of the past.

The government of the world's eighth largest economy and largest U.S. municipal bond issuer faces a $25 billion deficit over the next year half, its budget watchdog says. That includes a $19 billion shortfall in the fiscal year starting next July -- nearly a quarter of projected revenues.

It is the latest sign of stress in a state still limping from the housing bust, desperate for jobs and taking a maverick approach to politics -- Democrats swept California's top offices in last month's Republican-dominated election.

Investors are setting expectations below low for the special session which begins on Monday, roughly a month before Schwarzenegger leaves office. "I don't have an expectation. I have a non-event," said Bill Mullally, president of Alamo Capital in Walnut Creek, California.

Democrats who control California's statehouse have no intention of working with Republican Schwarzenegger. "We're not going to negotiate anymore with this governor," said Charles Calderon, Democratic majority leader in the State Assembly.

Republican lawmakers have much less power to influence spending plans under new rules approved by voters and ignored the moderate governor during the 2010 election.

"Brown would be a big winner if Schwarzenegger and the legislature solve the problem, but I don't think that is going to happen," said Bob Stern, president of the Center for Governmental Studies who worked briefly for Brown decades ago.

But three weeks of fighting before the new governor rides in might help legislators and voters alike grasp the difficulty of the decisions California faces.

"We all need some education in terms of how serious the problems are," he said.

YEARS OF SLEIGHT-OF-HAND

The state's budget watchdog laid out the challenge in a recent report. California's budget will be $6 billion under water by the time the current fiscal year ends next June, and the next year's budget will fall short by $19 billion.

For years after that, budgets will be $20 billion short on average, and years of sleight of hand have left California with precious little room for new budget magic -- such as the move which pushed back paydays from the end of one month to the start of the next, chopping a month's bills off one year.

Voters in November agreed to drop supermajority requirements to pass a budget -- but only for spending plans without tax hikes. And they closed several loopholes for raising fees and borrowing lawmakers had used.

Schwarzenegger called the special session to plug the newly gaping $6 billion hole for the rest of the fiscal year.

Jack Citrin, director of the Institute of Governmental Studies at the University of California, Berkeley, said any progress would be welcomed by Brown.

'"Let Schwarzenegger do some of the dirty work,' Brown and backers might conclude," he said.

Schwarzenegger's team sees the current governor working on the current budget and Brown working on the 2010-2011 plan. "We've been in touch on the budget and everything else," said spokesman Aaron McLear. Any savings in the current year would feed into the next, he predicted.

The question is whether talks will be coordinated enough so that both governors reach the same solutions.

"If the special substitutes for the first three weeks of what is going to happen in January, then it's a plus," said Stephen Levy, director of the Center for the Continuing Study of the California Economy, who saw debt costs, pensions and state-local payment burdens as key issues to reform.