California budget woes may force government overhaul

SAN FRANCISCO (Reuters) - California’s government may see a dramatic overhaul because its budget is in such disarray and on track for a staggering shortfall of at least $15.4 billion, lawmakers and analysts said on Friday.

Gov. Arnold Schwarzenegger called that deficit estimate “certain” on Thursday, warning the budget gap for the next fiscal year would swell to $21.3 billion if voters reject budget-related ballot measures in a special election on Tuesday.

Surveys suggest voters will reject the measures.

In either case, the most populous U.S. state faces sharply reduced spending, with Schwarzenegger, a Republican, seeking deep cuts in education and health and human service programs. Additionally, 5,000 state employees will receive pink slips and the state will need to borrow $6 billion with a revenue anticipation warrant.

Lawmakers responded with vows of fiscal austerity. But Assembly Majority Leader Alberto Torrico said a more dramatic effort may be needed.

“We are in dire need of streamlining,” he told Reuters. “We should have a conversation about what our priorities are as a state. ... I don’t think we can go through this budget and try to offend the least amount of people.”

That marks a dramatic shift for the legislature’s Democrats, who typically fight against spending cuts, said Bill Whalen, a research fellow at the Hoover Institution and former speechwriter for former Republican Gov. Pete Wilson.

Republicans likewise must make a bold gesture, Whalen said, noting they could back new revenues despite their anti-tax pledges and over Schwarzenegger’s opposition to tax increases.

“Both parties have to be mature about this and be open to compromise,” Whalen said.

For officials across California, Schwarzenegger’s shortfall estimates and proposals to address them, including a shorter school year and releasing prisoners, were sobering.

“The order of magnitude and ultimate composition was eye-opening,” said Steven Frates, of the Rose Institute of State and Local Government at Claremont McKenna College. “By Wednesday many minds around the state will be highly focused on how to address the situation. ... This may be one of those times pregnant with the possibility for an overhaul.”

The state government also may tap local governments for money -- even if cash is in short supply at city halls across the state and as local officials slash their own budgets to cope with declining revenues.

“Our members don’t have any more to give,” said John Shirey, director of the California Redevelopment Association. “They’re imposing furloughs, they’re not filling vacant positions and they’re cutting back services in order to balance their budgets.”

Schwarzenegger made sure on Thursday to drive the pain of spending cuts home -- and scolded lawmakers for not tackling California’s “budget madness” as he has long urged.

“Behind those numbers are kindergarteners that are learning how to read, firefighters risking their lives to keep us safe, or health care workers ensuring that our elders remain at home, or our law enforcement protecting our streets and so on,” he said. But “we have to only spend what we have.”