Schwarzenegger preps for final annual address as he faces familiar problems with Calif. budget

Schwarzenegger faces final year in sea of red ink

SACRAMENTO, Calif. — Gov. Arnold Schwarzenegger is entering his final year in office much as he began his tumultuous tenure as California’s leading political figure.

He oversees a state beset by financial turmoil and burdened by a budgeting system that offers few politically palatable options. On the eve of his final annual address to lawmakers, the Republican governor finds himself with little remaining time to enact the financial reforms he promised when he took office.

Still, he suggested to reporters Tuesday that he is not ready to relinquish his reign as the head of the nation’s most populous state.

“I do not acknowledge the fact that it is my last State of the State or that it is my last year. So just let me live in denial,” he told reporters after he was asked about his plans for his final year.

Schwarzenegger’s state of denial about his shrinking window of opportunity may reflect his feelings about the lack of progress he has made on the central mandate Californians delivered in 2003, when they recalled one governor and installed a celebrity in the governor’s office. The message was to fix California’s budgeting process.

Schwarzenegger faced an estimated $16.5 billion deficit and projections of another in the following fiscal year when he took over from the ousted Gov. Gray Davis. He persuaded voters to pass a $15 billion bond to cover the initial shortfall, a debt Californians continue to pay. The state treasurer’s office says taxpayers still owe nearly $8.4 billion and will shell out an additional $2.5 billion in interest to pay it off.

After a succession of ballot initiatives, blue-ribbon commissions and alternating threats and pleas to lawmakers, he has failed to secure the robust rainy day fund, stable revenue stream and tax reforms he says would end California’s boom-and-bust budget cycles.

A bipartisan commission Schwarzenegger helped establish issued a report last September on overhauling the state’s tax system after a year of meetings, but its recommendations have languished since then.

Schwarzenegger and lawmakers enacted a series of temporary tax increases last year and made deep cuts across all state programs the past two years. But they still face a $6 billion budget in the fiscal year that ends June 30. A projected $14 billion deficit looms in the following fiscal year.

The level of spending cuts already made to education, colleges, health care services and other programs leaves Schwarzenegger with few options when he presents his budget plan for the 2010-11 fiscal year on Friday.

In his State of the State address, scheduled for Wednesday morning in the Assembly chambers, the governor is expected to spell out how he believes California is faring. He also is expected to address his plans for guiding the state through another tough year, including long-standing efforts for budget, tax, political and pension reform.

Schwarzenegger on Tuesday declined to answer specific questions about his speech, but he has signaled he will continue to push for some of the same reforms he’s been after since taking office.

“The bottom line is, our budget and tax systems are the root of a lot of our state’s fiscal problems,” he said last weekend in his first radio address of 2010. “Over the years, they have led to volatile swings in revenue and massive deficits. They have led to painful spending cuts and tax increases. This holds our economy back from its full potential.”

The governor’s spokesman, Aaron McLear, said California will be seeking more money from the federal government because the state receives only about 78 cents for every dollar it sends to Washington.

Being a “donor state” is a position California can no longer afford after nearly $60 billion in budget adjustments over two fiscal years through massive cuts to education and social service programs, temporary tax hikes, and federal stimulus funding, McLear said.

But with his approval rating around 27 percent, Schwarzenegger and his political clout won’t go much further in the nation’s capital than in Sacramento, where legislators already consider him a lame duck, said Jack Pitney, a political science professor at Claremont McKenna College.

“From the standpoint of popularity, he doesn’t have much to work with. The Obama administration doesn’t place Arnold Schwarzenegger high on its list of priorities,” Pitney said.

California is pleading with federal officials to waive rules requiring matching state money for federal programs, to share more of the cost of health care reform and help pay for imprisoning illegal immigrants. The state’s strongest argument is based on possible failure rather than success, Pitney said.

“That is, we might get federal aid not because our case is so strong, but because our condition is so dire,” he said.

Associated Press Writer Judy Lin contributed to this report.