Tomorrow morning around 7:40 AM I am going to be on Roy Ulrich’s Morning Review Friday on KPFK 90.7 FM to discuss the state’s structural revenue shortfall. One major element of that is the $2.7 billion in tax loopholes that LAO Elizabeth Hill identified. George Skelton reports in today’s LA Times that Arnold appears serious about closing these – but that much remains to be done:

Give him credit: Gov. Arnold Schwarzenegger is the first Republican in California’s Capitol to begin taking off the budget blinders.

He’s actually advocating tax increases, give or take some semantics….

It was clear to Schwarzenegger that, for political and practical reasons, the deficit hole could not be filled with spending cuts alone. He decided to support loophole closings. But advisors were surprised when the governor spontaneously popped out with the idea the next morning during an audience Q&A after addressing Town Hall Los Angeles.

“I’m a big believer,” he said, “that when we have a financial crisis like this that we all should chip in. And this is why I totally agree with the legislative analyst’s office when she says that we should look at tax loopholes….

Democratic leaders should consider it an invitation to offer Schwarzenegger a tax proposal. The governor finally agrees with them, it seems, that the state does have a revenue problem — not simply a spending problem.

This is a productive development, as it is becoming obvious that catastrophic education cuts are not the answer to our budget crisis. But even this welcome news has to be tempered by some political and fiscal realities.

First, there seems to be some disagreement among Sacramento Democrats on what to do about the budget. Skelton believes that the Arnold-Núñez vs. Perata dynamic is about to replay itself:

Senate President Pro Tem Don Perata (D-Oakland) wants to fashion a budget proposal through the traditional legislative process, with public hearings, and avoid closed-door negotiations between leaders and the governor. That’s fine. But this is ominous: He’s vowing “the fight of a lifetime,” threatening to block budget passage all summer if necessary to protect school funding, insisting loophole-closing isn’t enough and talking up a sales tax increase.

Assembly Speaker Fabian Nuñez (D-Los Angeles) is more attuned to Schwarzenegger.

“If other Democrats want to beat up the governor, I respect their views,” he says. “But I think the governor is a good man and doesn’t want to make cuts any more than I do. Now it’s up to us to show him a road map to a balanced budget.”

Nuñez isn’t ready to support a general tax increase, like on sales. That should be a “last resort,” he says. For now, he advocates closing business loopholes. For example, he’d impose an oil severance tax — California is the only state without one, he says — and raise $1 billion.

Núñez is simply wrong to believe that a general tax increase can be avoided. An oil severance tax has its place, but even with loophole closures, something like a sales tax increase – or sales tax modernization – or the restoration of the VLF is a necessity if we are to avoid crippling cuts. Tax loophole closure and an oil severance tax would bring in around $3.7 billion, but that leaves over $4 billion in cuts. The VLF sits as a fat target, with the potential to bring $6 billion a year into the state’s account. It would be nice if someone in Sacramento started talking more loudly about that.

Of course, it’s by no means clear what role Núñez, who has grown closer politically to Arnold over his term as speaker, will actually play in these negotiations. Whereas the Senate handover of power from Perata to Darrell Steinberg is scheduled for August 21, the transition from Núñez to Karen Bass is much less clearly defined. And we don’t yet seem to know where Speaker-elect Bass stands on the tax issue.

We do know where the Yacht Party stands. Capitol Alert reports today that Dick Ackerman and Mike Villines have both come out strongly against any new taxes. They’ve decided to stake their party’s future on the construction of an aristocracy in California, where low taxes are paid for by permanent inequality as our education, transportation, and health care services are destroyed and with it, the state’s economy.

A united front is going to be necessary to break the Republicans. Democrats need to work out their differences soon and present that unity, for the sake of Californians and the state’s future.

(This is the story of the week here in California, and deserves front and center attention on Calitics today. Updated with a YouTube of the press conference and a transcript of some of Perata’s remarks. – promoted by Robert in Monterey)

The headline, State Democrats determined to raise taxes, is kind of ridiculous, but the meat of the story indicates that Democratic leaders are drawing a line in the sand.

Democratic legislative leaders declared this morning that they are prepared to delay the state budget this year if that’s what it takes to get tax increases, which they called the only reasonable solution to California’s multibillion-dollar shortfall.

“This is going to be the fight of a lifetime,” Senate leader Don Perata (D-Oakland) declared at a news conference on the steps of a Sacramento high school that faces teacher layoffs and bigger classes under the governor’s proposed budget, which closes the deficit with spending cuts, borrowing and deferrals.

“We are not going to be going anywhere this summer,” he said, referring to the annual midyear process of trying to agree on a budget by the July 1 start of the new fiscal year. “I told everybody that wants to go to the Democratic [National] Convention, … TiVo it. That is close as you are going to get.”

Perata drew his line in the sand while standing with his successor as Senate chief, Democrat Darrell Steinberg of Sacramento, and other Democratic senators and school leaders. Perata said the governor’s proposal to cut school spending by 10% is unacceptable, and Democrats will reject any budget that includes less for education next year than this year.

There was a big press conference with a union coalition and the LAUSD today that essentially had the same purpose.  The Democrats are going to use this proposed slash to the education budget – with which will impact almost every county in the state – to demand a sensible resolution to our broken revenue structure.  Here’s Perata’s message:

Asked how Democrats propose to make up the difference, Perata said: “Raise taxes. That clear enough? Raise taxes.”

Given the state’s dire finances, he said, “no one is going to tell me . . . the average Californian would not be willing to pay pennies on the dollar more for an education system . . . that is worth what we believe California is about.”

The second statement is exactly the way to play this.  California is worth paying for.  This state deserves a better education system than it’s getting, a better health care system than it’s getting, better infrastructure than it’s getting.  Because of the broken revenue model, we can’t even fund the landmark global warming law that got the Governor on the cover of all those magazines.  Paying for this state to have the society everyone generally wants is a patriotic act.  That’s exactly the frame the Democrats are using.

There’s a hint of a “go-for-broke” strategy here, which I believe is sped up by the transition in the leadership.  We’ve needed to have this fight for 20 years.  Despite legislative majorities, the conservatives have been leading the way on fiscal issues for far too long.  It’s time to have this conversation once and for all, out in the open so that every Californian knows what’s going on.  Let’s put on our helmets.  This is going to be a long, tough slog.

UPDATE: From an Education Coalition press release:

Today a local coalition of concerned parents and educators held a press conference to discuss the real impact on local schools of the Governor’s proposed $4.8 billion cut to education funding, including more than $1.3 billion in projected in cuts to Los Angeles County schools.  They called upon members of the Legislature to uphold Prop. 98, the minimum school funding guarantee, and reject the draconian proposed cuts to schools and students.  

“Schools in Los Angeles are striving to meet the needs of a diverse student population while working to improve student achievement,” said LAUSD Superintendent David L. Brewer III.  “Our state’s leaders cannot continue to cut back on students’ education, without expecting to undermine our state’s most valuable resource and shortchanging California’s future.”

The proposed cuts are the equivalent of cutting more than $24,000 per classroom.

They’re planning on running ads about this, too.

UPDATE 2 [Robert]: Some of Perata’s remarks are transcribed below:

Perata: Well it’s not enough. He’s cut about 5 billion and he’s only half way there.  We’re looking at everything including the tax breaks. The governor recanted a day later so I don’t think he’s there yet. Got snapped at by the Republicans and went to the right corner. We want to fund education consistent with the need. First thing got to do and Tom McClintock says when in a hole got to stop digging.  We’re in a deep hole. I will settle for being eye level with street.

Q: How are you not going to cut the school classrooms?

[Robert: this is the best part of Perata’s remarks, IMO]

P: Raise taxes, is that clear enough. Raise taxes.  No one is going to tell me what’s at stake that average Californian wouldn’t be willing to pay pennies on the dollars more for an educational system here that is worth what we believe what California about.  Let’s face it sending more people to prison and paying $60,000 a year because we don’t have enough opportunities for kids when younger . We’re backwards.  It’s not going to get any better if keep doing this. I don’t care if it is a temporary tax increase, a long term tax increase, the longer we stop talking about the need to have more revenues and say that’s a nice anticeptic phrase for raising taxes the longer we are going to be here. And I tell you we’re not going home, we’re staying here, we are committed, if the Reeps can hang out last year for 30 days to undue the state budget we will do no less to make sure we will preserve the one institution that is the cornerstone of democracy.  If we believe it have to show we believe it.

Q: What taxes, cuts?

P: Hard enough for people to come to grips with saying the words. Now we are wet and you can’t get more wet so we are going to do what we have to do.  We are going to have to make cuts but we are not going to make cuts out of the classroom. There’s a lot of services Californians want that if you put that next to classroom education pales in comparison so they will be put on the table…And say let’s eliminate these things because we can’t afford them….the Governor thought he would try that with parks, that didn’t last too long, lasted about an hour. There are other things we do around here people don’t know about we are going to have to stop doing them. Make hard choices. But Savaging 10 percent of the school budget is not a hard choice it’s no choice at all. Not going to make that choice.

Q: What can schools count on?:

P: That this is fight of a lifetime.  Not going anywhere. Democratic Convention.  Told them Tivo it, close as you are going to get.  Dems in 90’s hung out until October and election year. We won and we won seats. [Robert: this likely refers to the 1992 budget fight with Pete Wilson, which dragged into October. Interestingly 1992 was a very Democratic year at the ballot box, just as 2008 is expected to be.]

Q: What types of taxes, temporary?

P: Two things have to consider, temporary is, we love sunseting things around here. We don’t have the best record for the way we spend people’s money. So maybe temporary better.  We may want to do more allow local districts like this one to have more flexibility, more opportunities to go to their own parents, own voters have kind of schools we used to have before Proposition 13.  Before Prop 13 school districts’ board members would decide what kind of budget they wanted to reflect their students and set the tax rate.  While here ought to be thorough look at everything.

What people seem to like best is a sales tax or raising taxes on others.

Capitol Alert is alerting, as it does that after a budget meeting yesterday that may have gotten a little dicey, Don Perata stripped Dem Sen. Joe Simitian (Palo Alto) of his chairmanship in the Environmental Quality Committee.  Simitian apparently had some dissenting notions on how education money should be apportioned.  Rising Senate Pro Tem Steinberg told the tale:

“We ran into a little bit of a controversy, if you will, with the Prop 98 issue and one of our members had a very legitimate, Joe Simitian had a very legitimate point of view about whether or not we rebench Prop 98,” said Steinberg. “You know Senator Perata and Senator (Denise) Ducheny (the chair of the budget committee) did not want to rebench Prop 98 down as a result of one of the cuts we were making.”

Of course this is more or less par for the course with Perata and handing down time-outs to misbehaving legislators.  He locked Dems out of their offices last year for wavering a bit too much on party loyalty and booted Rep. Sen. Jeff Denham (now being recalled thanks to Perata) from the Senate Governmental Organization Committee for not passing a budget.

I’m not gonna venture a guess as to what went on exactly in the meeting, but one wonders if/when these maneuvers will come with a stool in the corner and a dunce cap.  And whether, long-term, the party/Perata loyalty is improved or not.

Seems like a great deal of things are happening on the health care front, but I don’t think any of them point to significant reform in this legislative session.  In fact, people are trying to scramble for alternatives.

Dan Weintraub has a feature on Fabian Nuñez’ attempts to get through to the Governor that the other side of the aisle is simply not interested in compromise.  As Julia noted the other day, Nuñez will put the Governor’s plan up for a vote tomorrow, and nobody will vote for it.

The speaker says he intends to package the governor’s plan as legislation and present it to the Assembly, where it will surely die. In fact, Núñez said, his own vote for the bill, which he will cast as a “courtesy,” will likely be the only support the governor’s plan receives.

“I’m going to take him from the stratosphere, and I am going to ground him,” Núñez told me in an interview in his Capitol office. “He needs a little grounding. Nobody likes his plan.”

I don’t know how the Governor is going to respond to this, but clearly observers aren’t thinking it will end in sweetness and light.  They’re making other plans.  over…

State Sen. Darrell Steinberg is floating a plan to cover all children as a fallback reform should nothing else materialize.

“We ought to achieve comprehensive health care reform, but our first priority must be children,” Sen. Darrell Steinberg, D-Sacramento, said Wednesday at a Capitol news conference to tout children’s health care.

Steinberg’s Senate Bill 32 and a companion bill, Assembly Bill 1 by Assemblyman John Laird, D-Santa Cruz, would expand the children’s Healthy Families Program by increasing the household income limit from $51,625 for a family of four, or 250 percent of the federal poverty level, to $61,950, or 300 percent.

But there’s currently no funding in the legislation, which would require the state to spend $225 million more annually to cover the estimated 800,000 children without insurance in California.

Any legislation would have to be approved before the Legislature adjourns Sept. 14, unless Gov. Arnold Schwarzenegger calls a special session.

“If our bills become the vehicle (for health care changes), they will be amended to include a funding source to either fund the full amount or at least a significant start for year one,” Steinberg said.

Obviously, there’s no chance of this happening without S-CHIP expansion, which the Governor is trying to get the President to authorize.  Children’s healthcare is cheap and saves the state money in the long run, along with being simply the right thing to do.  But it’s a small step, not the big change that Californians want.  The Governor is opposed to a piecemeal approach, for the record, but could he really veto children’s health care?

To that end, a couple unlikely partners are looking to the ballot box for an eventual answer.

In 2004, the California Restaurant Association led the successful effort to repeal SB 2, which would have required employers to provide health insurance to their employees. On the other side of that multimillion-dollar battle was the California Medical Association and organized labor.

Labor and the CMA are both heavily engaged in the ongoing Capitol negotiations, while business groups have rejected both the Democrats’ and the governor’s proposal as untenable. But the restaurants’ proposal may serve as a starting point for negotiations for a possible November 2008 ballot initiative, just in case a deal cannot be hammered out this year.

“We are not ready to give up on current legislative proposals, but are interested in hearing what CRA has to say,” said CMA’s top lobbyist, Dustin Corcoran. “As a longtime proponent of universal health care, CMA welcomes any serious effort to reform health care and looks forward to further discussions.”

But Jot Condie, president of the California Restaurant Association, said his members are “moving forward as if the Legislature has already concluded its business.” Condie said, “It appears the Legislature is incapable of producing needed reform, so we decided to look to the initiative process.”

I don’t know whether this is serious or just an attempt to put pressure on the Legislature to get something done.  The CRA is floating an 1% increase in the sales tax to cover the cost of health care, that’s really all the details that have come out.

This might be just chaos before everything actually fits into place and a deal is brokered.  I’m not seeing that, however.

I wrote this for today’s Beyond Chron.

As if the state budget process wasn’t brutal enough, Arnold Schwarzenegger used the “blue pencil” last week to make even further cuts in social programs – to the tune of $700 million.  After the legislature went along with cuts in public transportation and drug treatment, Arnold took another $55 million out of mental health treatment for the homeless – effectively castrating state law.  A Governor who says he wants to pass universal health care cut over $427 million from the state’s Medi-Cal program, and in a gift to his friends in the insurance industry, $6.3 million to help Californians get cheap prescription drugs.  He says it was the only way Republicans in the State Senate would vote for the budget.  But with Dick Ackerman’s bad faith tactics that held our state hostage for 52 days, did he really have to keep such a Faustian bargain?  And with the process now behind us, will he aggressively push to nix the 2/3 vote requirement to pass a state budget, and prove his “post-partisan” credentials?

When it comes to passing a budget, California’s Constitution is beyond absurd.  Not only are we one of only three states to require a super-majority vote of the state legislature, but the Governor then has the right to cut out any expenditures in the budget – a practice known as “blue-pencil.”  The state legislature can only override these cuts by a two-thirds vote.  The U.S. Supreme Court threw out a similar “line-item veto” at the federal level, but California has its own rules that it can live by.

The Governor cut $55 million from mental health, eliminating a six-year old housing program that serves 4,700 adults with severe mental disabilities – all of whom were homeless and frequently hospitalized or incarcerated.  Participants in the program have reduced their number of days spent homeless by 67%, increased the number of days working full-time by 65%, and reduced the number of days incarcerated by 72%.

“This is a program that works, that saves the state money in incarceration costs and that humanely treats a population that usually gets short shrift in Sacramento,” said State Senator Darrell Steinberg, who authored the original legislation.  Schwarzenegger replied that there’s still money from Proposition 63 – the 2004 ballot measure that taxed millionaires to fund mental health programs.

But Prop 63 was intended to supplement existing funding, not to replace it.  When it comes to mental health funding, the Governor effectively robbed Peter to pay Paul.

Of the $700 million that Schwarzenegger cut out of the budget, 75% of the money came from Health and Human Services – with $427 million coming out of the state’s MediCal program.  It’s ironic, given that the Governor says he wants to pass universal health care in California, that when given the choice of what cuts to make he cut health care.

Arnold cut $6.3 million from the California Discount Prescription Drug Program – a project that helps low-income Californians buy affordable prescription drugs.  The health insurance lobby, which gave $5 million to Schwarzenegger’s campaign, had strongly opposed this program because it hurts their bottom line.

I could go on forever, but you get my point.  To read more details about the Governor’s cuts, click here.  But what’s most galling is what he chose not to cut out of the budget – a $45 million tax break for yacht, private plane and recreational vehicle owners.

The Governor was supposed to sign the budget that passed the State Assembly last month – which cut $1.2 billion in public transit, slashed drug treatment programs and delayed cost-of-living adjustments for SSI recipients.  But then the Senate Republicans decided to hold up the budget just because they could.  Only after Arnold pledged to cut another $700 million from the budget did the right-wing extremists end their 52-day tantrum.

Senate Minority Leader Dick Ackerman, who led the standoff, deserves all the outrage coming his way.  But Schwarzenegger never promised him where the cuts would come from, at least not publicly.  He could have either refused to let the Senate Republicans blackmail him and break his promise – or he could have cut $700 million out of the budget in places that didn’t hurt the most vulnerable.  Since Ackerman is a yacht enthusiast, he could have stuck it to him by eliminating his $45 million tax break.

For a Governor who claims to be “post-partisan” and has co-opted Democratic issues in a very blue state, Schwarzenegger showed his true Republican colors.  When the Senate Republicans finally backed off the budget last week with minimal changes, commentators ridiculed Ackerman for having gotten so little out of the standoff.  But with the Governor’s “blue-pencil” cuts, we know that the right wing had the last laugh.

The state Constitution allowed Schwarzenegger to make these drastic cuts, but it also allows the state legislature to override them with a two-thirds majority.  While I dread the prospect of going back to the Senate Republicans to override the Governor, these cuts are so disastrous that we cannot let Arnold get away with it.  Publicly humiliating Arnold and the Republicans is what it will take to prevail.

For starters, you can do what L.A. blogger David Dayen did – fax the following
certificate of appreciation to the office of Senate Minority Leader Dick Ackerman.  And stay tuned with the California Progress Report, California Majority Report, and Calitics.com for more ideas.

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