Gov. Arnold Schwarzenegger on Tuesday told a joint session of the Legislature that California's budget crisis will force a transformation in state government.
The state faces a $24.3 billion deficit and a looming cash crisis that jeopardizes its ability to pay its day-to-day bills. The governor said government must become more efficient and learn to provide services for less in the years ahead.
"Our wallet is empty. Our bank is closed. Our credit is dried up," he said in the rare midyear appearance, which lasted less than 15 minutes.
His speech comes just four months after he and lawmakers agreed to a two-year budget package that was intended to close a deficit of $42 billion through mid-2010.
Declining tax revenue and overly optimistic assumptions about the tax increases they approved in February have reopened the state's deficit.
Schwarzenegger said state tax revenue has dropped 27 percent from last year and has returned to 2003 levels.
In a letter to legislative leaders last week, Controller John Chiang warned that California will run out of money to pay its bills on July 29. He called on lawmakers to pass a balanced budget by their June 15 constitutional deadline so the state can access short-term loans in a tight credit market.
Its new fiscal year begins July 1.
"California's day of reckoning is here," Schwarzenegger said.
He has outlined a series of cuts that include an additional $5.2 billion reduction to public schools, laying off 5,000 state workers and further cutting the pay of another 200,000. He has proposed eliminating welfare for 500,000 families, terminating health coverage for nearly 1 million low-income children and closing 220 state parks.
"People come up to me all the time, pleading, 'Governor, please don't cut my program.' They tell me how the cuts will affect them and their loved ones," Schwarzenegger said. "I see the pain in their eyes and hear the fear in their voice. It's an awful feeling. But we have no choice."
The Republican governor and legislators of his own party say they will not raise taxes, after agreeing to $12.8 billion in higher sales, personal income and vehicles taxes earlier this year.
Democratic and Republican lawmakers agree they face a series of bad choices.
In the May special election, voters rejected all five budget-related measures placed on the ballot by Schwarzenegger and legislative leaders. That included three the governor said would have raised about $6 billion. Another measure would have extended the tax hikes for one to two years.
Schwarzenegger has said he interpreted voters' rejection as a repudiation of borrowing and further tax increases to balance the budget, but their message is far from clear. On Election Day, many voters said they were simply frustrated about being asked to vote in a non-election year on complicated issues they believe should be decided by elected officials.
Schwarzenegger also asked lawmakers to eliminate some state boards and commissions, reviving parts of his 2004 California Performance Review. While getting rid of them will solve only a fraction of the state's deficit, the action is intended to send a symbolic message to taxpayers.
State revenue has continued to plummet as residents have reduced spending and the state's unemployment rate soared to 11 percent. Democratic lawmakers and the Schwarzenegger administration have even inquired about having the federal government give California a loan guarantee, an unprecedented step that is seen as way for the state to lower its borrowing costs.
Despite the doom and gloom, Schwarzenegger also tried to convey a more hopeful message, asking lawmakers to rise to the challenge and demonstrate to the rest of the nation that California can dig its way out of its deep budget hole.
The crisis provides an opportunity to make state government operate more efficiently and stretch taxpayer dollars.
"People are writing California off. They're talking about the end of the California Dream," Schwarzenegger said. "Let's prove all the pundits wrong. Let us use this crisis as an opportunity, as an opportunity for great changes, lasting changes."
