May 14, 2010 / 11:00 PM / 10 years ago

Schwarzenegger compares California's woes to euro zone

SACRAMENTO (Reuters) - California Governor Arnold Schwarzenegger on Friday compared the state’s predicament to that of weaker euro zone economies and called for scrapping the state welfare system to close a $19.1 billion budget gap.

California Governor Arnold Schwarzenegger proposes his $83.4 billion state budget plan in Sacramento, California May 14, 2010. REUTERS/Max Whittaker

The movie star turned governor said California, the most populous U.S. state with an economy that would be the eighth largest in the world, faced the same dilemma of dismal growth and budget gaps as Greece, Spain and Ireland.

California’s government has been living beyond its means and has little choice but to cut $12.4 billion in spending over the remainder of this fiscal year and the next, Schwarzenegger told a press conference in Sacramento.

“You see what is happening in Greece, you see what is happening in Ireland, you see what is happening in Spain now,” Schwarzenegger said, referring to swelling deficits and austerity measures that have concerned investors worldwide. “We are left with nothing but tough choices.”

Democrats and Republicans, who must muster a two-thirds majority to pass a budget, are likely to ignore many of his suggestions in a debate which, if it follows recent history, could drag on for months.

Democratic State Senate President Darrell Steinberg told Reuters that lawmakers in his party, who control both chambers of the legislature, could not support Schwarzenegger.

“The cuts are absolutely unacceptable,” Steinberg said, adding that instead of slashing spending Schwarzenegger should help Democrats delay business tax breaks.

Republican Assemblyman Jim Nielsen, the vice chair of the budget committee, said both sides felt the “absolute imperative” for immediate action and praised Schwarzenegger’s decision not to push for new taxes.

“That would simply fund the broken budget at the higher levels that are not sustainable,” he said.


Thanks to stronger than expected revenue early in the year and new finance rules the state will be able to pay debt coming due in May and June, although it could face problems late in the summer, Schwarzenegger said.

Investors have scooped up recent offerings of California debt with high yields, convinced by state payment guarantees.

Meanwhile schools have cut teachers, social services are drying up and most state employees face regular furlough days.

The spending cuts in Schwarzenegger’s proposed $83.4 billion 2010-2011 budget include eliminating the CalWORKS welfare program and many child care programs and cutting funding for local mental health services by 60 percent.

California’s budget deficit had been estimated at $19.9 billion at the beginning of the year.

Since then some revenues have come in higher than expected but opportunities to make cuts have also dried up, concerning credit agencies who now rate state debt only a few notches above speculative, or “junk,” status.

Schwarzenegger in January acknowledged his proposed spending cuts for health and welfare programs were “draconian.” But the state already has some of the highest income and sales tax rates of any U.S. state.

“There is something wrong with our system. That is what I’m trying to tell people. There are going to be people screaming for more taxes — we’ve done that,” Schwarzenegger said. “Let’s stimulate the economy and let’s create the jobs. That’s the important thing.”

He called on lawmakers to tackle growing costs for the state pension fund and to reform its tax system, which relies heavily on volatile personal income and capital gains taxes for revenue.

Outside the event, protesters denounced Schwarzenegger’s plan, chanting “Shame on you”. Handicapped activists said they feared losing caregivers funded by the state.

“I might as well just die,” said wheelchair-bound Carmen Rivera-Hendrickson, who relies on daily in-home health care.

Writing by Dan Whitcomb; additional reporting by Marianne Russ; Editing by Andrew Hay

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