California Insider

Arnold Schwarzenegger considers himself a master strategist. But in the heat of his first legislative battle, he seems to have lost sight of what his goal really was. He ended up losing while fighting for something he didn't really need and might not have even wanted. Having morphed from Arnold Schwarzenegger into Gov. Schwarzenegger, he allowed himself to get sucked into the very kind of non-sensical partisan deadlock that, as a private citizen, he used to decry.

Schwarzenegger watched from his office Friday night as lawmakers rejected his proposal for a $15 billion bond and a new state spending limit. Although on the surface the votes appeared to be an embarrassing first defeat for Schwarzenegger, the turn of events probably won’t be much of a political blow. Schwarzenegger, if he likes, can now go to the voters and say, ‘‘See, this just confirms what we knew all along: the Legislature is dysfunctional.’’ He can gather signatures for his spending limit and likely pass it, either in a special election this spring or in November. If that’s what he wants to do.

But the real problem Schwarzenegger faces isn’t political, it’s mathematical. Even with his bond, which mostly refinanced current debt, he was still facing a projected gap next year of at least $10 billion. Now that chasm will grow to $14 billion or more, depending on whether the Legislature agrees with his proposal to use state money to make local governments whole for the billions they lost when he rolled back the car tax.

That $14 billion will have to be cut from less than $50 billion of the general fund if Schwarzenegger lives up to his commitment to spare K-12 education from cuts and reject any tax increases. But the governor already has expressed regret, and some reservation, about the $2 billion in annual cuts he has put on the table so far. He needs to do that at least six more times to balance the budget. And no spending limit is going to make that chore any easier.

What’s more, the $10.7 billion deficit bond which the Legislature approved last summer and which Schwarzenegger said was legally suspect is now, for the moment, all that stands between the state and effective insolvency. If the courts strike it down, and they might, that money would be added to the shortfall for next year. California would be out of cash and out of luck, at the mercy of the bankers and facing a certain tax increase, deep cuts and national shame.

Such a scenario is the one Schwarzenegger, to his credit, was trying to avoid with his own bond measure, which would have gone to the voters for their blessing, making it legal and safe from challenge. And Schwarzenegger, after an early feeling-out stage, came to terms with lawmakers from both parties on the shape of a bond issue. He also was within reach of a deal on a balanced budget amendment and some sort of new reserve requirement, a rainy day fund to prevent future deficits in economic downturns.

The problem was always the spending limit. While Schwarzenegger told the people he was proposing a “never again” measure that would have prevented a recurrence of the state’s fiscal meltdown, his bill actually went much further than that. It sought to put in the constitution a formula that would have reduced spending next year to revenue levels projected this May, then allowed spending to increase after that at a rate no faster than the growth of population and personal income.

Schwarzenegger, in effect, was asking legislators on a few days notice to adopt a constitutional amendment that would have banned tax increases to solve next year’s problem and made higher tax rates all but impossible to enact forever more. There was simply no way the Democrats who control the Legislature were ever going to agree to such a provision.

Faced with that reality, the governor had two options. He could have dropped the idea for a formula-driven spending limit and won approval instead for a balanced budget amendment and reserve requirement, both of which were clearly doable and would have kept faith with his campaign promises and recent rhetoric. Or he could have pushed for a spending limit that wouldn’t take effect until after the state dug itself out of its current abyss. That would have let the Democrats preserve their right to push for tax increases next year while still giving Schwarzenegger his long-term win on fiscal reform, or at least the Republican version of it. And ultimately, the Democrats can’t raise taxes next year unless Schwarzenegger lets them. He can veto anything they send his way. So he would have remained firmly in control of the state’s fiscal fate. In a sense, the spending limit seemed to be aimed more at restraining his impulses than the Legislature's.

There were other problems with Schwarzenegger’s bill. In one section designed to let governors initiate mid-course corrections when a deficit is building, the measure allowed chief executives not just to reduce spending but to change any state law to close an emerging gap. Under such a provision, a governor could change sentencing laws and let prisoners go free, or raise taxes by fiat, and those changes would take effect automatically unless two-thirds of the Legislature voted to reverse him within 30 days.

The governor’s bill also was sloppy in its handling of Proposition 98, the existing constitutional provision that guarantees minimum funding for schools. While the measure appropriately trimmed the growth of future education spending when necessary in order to build a reserve, the bill also would have forced the state to increase spending on schools whenever a governor dipped into the reserve in a fiscal emergency. That didn’t make any sense.

But those kinds of details could have been fixed. The real problem was that Schwarzenegger was asking the Democrats, as they head into a pivotal battle over the future of California government, to lay down their weapons and surrender. They weren’t going to do that Friday night. They won’t ever do it. His only choice now is to stop asking them to do it, or to go to the voters.

Before he does so, the governor might want to think for a while about whether that’s really what he wants to do. Given his campaign promises for more funding for the schools, for higher education, more roads, more transit, more health care, Schwarzenegger doesn’t sound like a small-government Republican. His first words as a candidate were to say that more jobs would bring more revenue to the state for more programs he and others support. Now he is fighting for a constitutional provision that would prevent him from spending the very revenues he said he wanted to see flow from an improved economy.

What Arnold Schwarzenegger wanted before he became Gov. Schwarzenegger was a government that lives within its means, one that spends no more than it takes in and doesn’t face massive deficits. He could have won a measure guaranteeing all that Friday night. He still might, if he takes a step back, takes a deep breath, remembers who he is and gets back to work.

Gov. Arnold Schwarzenegger suffered his first legislative defeat Friday night when lawmakers rejected his proposals for a $15 billion bond and new state spending cap. Schwarzenegger aides say he is preparing to take his case to the ballot. I will comment on that development and what it means for the near and long term future later today. For now, here is the Bee’s story on the action.