SACRAMENTO, Calif. – During last summer's fiscal crisis, Gov. Arnold Schwarzenegger borrowed the title of a film classic to describe California's budget, saying it contained "the good, the bad and the ugly."
He was referring to welfare reforms and the streamlining of state boards that he was able to broker, along with deep spending cuts for schools, health care programs for the poor and AIDS-prevention efforts.
All that's left in 2010 is the ugly.
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The nation's most populous state faces a nearly $21 billion shortfall over the next 18 months, a deficit that comes after years of making deep cuts in core state programs.
Enrollment in California classrooms could swell, public colleges may further limit enrollment and raise student fees, state workers could face another year of furloughs, and the poor may stop receiving welfare unless Schwarzenegger and lawmakers agree to raise revenue.
"It will be an absolutely hard and difficult year," said Assemblyman Ted Lieu, D-Torrence, who is exploring a run for attorney general.
As the Republican governor winds down his tenure, he faces one last budget battle, the legacy of a recession that has upended California's economy and choked the flow of tax revenue coming to government. The crash in tax revenue has depleted California's general fund, which has fallen from a high of $103 billion in 2007-08 to $84.6 billion in the current fiscal year.
While Democrats are expected to make a play for tax hikes, Republicans can be counted on to push back. Both fear voter revolt in an election year, creating the likelihood of political stalemate and yet another drawn-out budget tug-of-war.
Since February, California has made nearly $60 billion in adjustments to its annual spending plan. That has come in the form of cuts to education and social service programs, temporary hikes in the sales and income taxes, an increase in the vehicle license fee and one-time infusions of cash from the federal stimulus package.
The stimulus funding and temporary taxes will begin to end at the end of 2010, leaving less revenue for the second half of the fiscal year that will begin in July. Compounding California's problem are lawsuits that have reversed several of this year's budget decisions, contributing to a $6 billion deficit in the current fiscal year.
The state also has been unable to adopt prison and health care cuts it passed in the last budget.
California's fiscal troubles are felt throughout the country because it is such a powerful economic engine, accounting for 12 percent of the nation's gross domestic product and the largest share of retail sales of any state.
Its financial problems are felt in many other states, as well. Nationwide, states closed a cumulative budget gap of nearly $146 billion in the current fiscal year caused by falling income, sales and corporate tax collections.
According to the National Conference of State Legislatures, three dozen states reported that budget shortfalls have re-emerged even before their fiscal years have ended.
The Denver-based group says they face a cumulative budget gap of $55.5 billion in the coming fiscal year, which begins in July for most states. States that include Arizona, Colorado, Hawaii, Iowa, Maryland, Nevada, New Jersey, New York and Vermont are again facing double-digit gaps.
"The problems are not getting better," said Arturo Perez, fiscal analyst with the group.
Even if the recession ended, it typically takes state governments another year or two to recover. That means more cuts, taxes and difficult choices ahead, Perez said.
Schwarzenegger is expected to unveil his latest spending plan in early January with cuts, requests for billions in additional federal aid and tax changes that include raiding a fund fed by a gasoline tax.
He also could bring back previous proposals that failed, such as authorizing additional oil drilling off the Santa Barbara coast.
The governor is expected to press his case in Washington. He has repeatedly pointed out that California receives about 79 cents for every dollar it sends in federal taxes.
In a Dec. 22 letter to House Speaker Nancy Pelosi, Schwarzenegger said the federal reimbursement rate for state Medicaid programs forces California to subsidize health costs for other states. He wrote that if California received a reimbursement rate equal to the average of the 10 largest state, it would be receiving billions more each year.
He has threatened to eliminate other social programs such as the in-home care program for frail seniors and the disabled unless the federal government makes adjustments.
"We reduced services to specified populations in our In-Home Supportive Services program, but federal court decisions have prevented those reductions from occurring," Schwarzenegger said in his letter. "California is now faced with a decision to eliminate the entire IHSS program."
He also could threaten to eliminate CalWORKS, the state's main welfare program, as he did last year.
Anthony Wright, executive director of Health Access California, a labor-sponsored health care advocacy group, said the governor's approach reflects California's budget constraints. The state carries an unusually high two-thirds vote requirement to pass a budget or tax increases, and lawmakers have limited discretion on spending because much of the money has been locked in by voter-approved ballot initiatives.
While the federal government may give states a second round of assistance, they should not count on a bailout, said Scott Pattison, executive director of the National Association of State Budget Officers in Washington, D.C. He said the stimulus funding was only a temporary fix.
"If states don't recognize they need to do some serious financial reforms, it would really be a shame and postpones hard choices," Pattison said.
It's not clear whether California lawmakers have the political will, especially during an election year, to enact long-term budget reforms. A bipartisan tax commission created by Schwarzenegger and Assembly Speaker Karen Bass, D-Los Angeles, recommended sweeping tax overhauls that could end years of topsy-turvy budgeting.
In September, the panel recommended repealing the sales and corporate taxes, flattening the income tax rate and imposing a new type of tax on a wider variety of businesses that would include the service sector. The recommendations have failed to gain any traction in the Legislature.
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