Fiscal woes imperil Schwarzenegger

With California's debt topping $16 billion, the governor is stuck with a legislative standoff over tax hikes.

Four years ago, he left Hollywood to save America's most populous state from "girlie men," legislators who "couldn't balance a checkbook." Calling himself the people's governor, he declared war on the state's special interest lobbies and promised to make a dysfunctional state work smoothly again.

Now, he finds himself in the same fiscal straits – $16-billion-plus in state debt – as the infamous governor he replaced in 2003's recall election, Gray Davis. And California's legislature is once again gridlocked.

Politicos laud Gov. Arnold Schwarzenegger for his leadership on global warming. They grant him kudos for his optimism and his embrace of post-partisan values – his Republican administration is peppered with Democrats. But the laundry list of failures is growing – from his ambitious healthcare reforms to his plans for overhauling the state's water infrastructure – and his own party faithful are falling out of step, causing a renewed legislative impasse.

Now, with an economic slowdown looming, some pundits are wondering aloud if Governor Schwarzenegger's tenure will ultimately be judged a failure. Others counter that the still-popular Schwarzenegger is doing as well as any governor can, given the downturn and California's built-in administrative problems.

"The mood in the capital is more upbeat [than before he took office] but that's about it … he's got us right back where Gray Davis had the state," says Sherry Bebitch Jeffe, a political scientist at the University of Southern California.

The downturn is not helping, she says, as it is depressing income for state departments while undermining negotiations for everything from healthcare reforms to prisons.

In trying to close the yawning fiscal gap, Schwarzenegger is locked in a battle with both the legislature and the state's independent legislative analyst. The governor has proposed a budget that would cut government spending by 10 percent, including healthcare and public assistance, and that would mean closing 48 state parks and slashing $4.7 billion from schools.

He also wants to use more borrowing and fund transfers, which critics say are well-worn gimmicks that will only postpone the problem.

Legislative analyst Elizabeth Hill has taken the unusual step of drafting a counter plan that would raise taxes by at least $2.7 billion and modify or eliminate a dozen tax breaks. Instead of closing 48 state parks, she says, government fees can be raised. And she has targeted what she calls a major "sloophole," that allows yacht buyers to avoid sales taxes by keeping their newly purchased boats out of the state for 90 days.

Many Democrats have embraced Ms. Hill's ideas, but the governor and GOP legislators have said they will continue to block tax increases.

The standoff is yet another indication that California's governance problems are structural rather than a reflection of its chief executive, say many analysts. "There are weights that even Arnold Schwarzenegger cannot lift," says Jack Pitney, a political scientist at Claremont McKenna College.

The heaviest of these, say Mr. Pitney and others, is the requirement of a two-thirds majority in the legislature to pass a budget. That is a high bar for any state, but especially so in California where over 75 percent of legislative districts are considered "safe," meaning incumbents are entrenched and have little fear of being voted out of office.

"It is nigh on impossible to get the legislature to agree on anything significant," says Barbara O'Connor, a political scientist at California State University, Sacramento.

The ideological differences are also magnified because of the state's gerrymandered district map, she says. Yet, attempts to redraw districts are regularly defeated – two such measures have failed in the past two years.

Another major structural problem is that many spending and income formulas are set by previous state initiatives, including a 1978 property tax cut and Prop. 98 which locks in a substantial proportion of the state budget for education.

Such policies "rob" the legislature's ability to shape spending, says Tony Quinn, a Sacramento-based analyst. "What we have here is auto-pilot spending which is a whole bunch of spending plans that are built into law that generate a larger and larger segment of the state budget every year and the legislature has less and less direction."

Despite the current impasse, most analysts agree that Schwarzenegger has brought a breath of fresh air into the statehouse. His popularity remains high – 58 percent approval in one recent state poll – in part because of his special brand of joviality, manifested in jokes from the bully pulpit, his self-deprecation, and his beneficent arm-twisting of legislators. His wife, Maria Shriver, has also helped his popularity.

"Everywhere they go, people love them and they love the fact that her Kennedy-family background has helped chasten Arnold's conservatism," says O'Connor.

Citing last year's ambitious initiatives on global warming and health insurance, O'Connor says: "People like [the fact] that he tries to slay the big dragons. He doesn't always win but they give him points for trying."