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California Scrambles to Bridge Huge Funding Gap - 2003-12-10

California political leaders are scrambling to bridge a multi-billion dollar shortfall in the state's budget. A major credit agency has lowered the state's rating, while local officials say they may be forced to reduce essential services.

The immediate problem is the loss of $4 billion in previously expected tax revenue caused by Governor Arnold Schwarzenegger's rollback of the annual car tax. His predecessor had tripled the tax. Fulfilling a campaign promise, within hours of taking office last month, he reversed the decision.

The state government collects the tax from every car owner on behalf of local communities. Cities and counties use that money to pay for police and fire services.

This week, Los Angeles Mayor Jim Hahn and other city officials lined up 190 police cadets and firefighters to show the jobs that could be lost in Los Angeles alone, unless the state provides the money.

"This is what $19 million a month looks like: 190 public safety officers. This is what we use the money to pay for. This is where tax dollars go. And if Sacramento takes away money from local government, this is what's at stake," he said.

Tuesday, the credit agency Moody's Investors Service downgraded $40-billion worth of California bonds, and it criticized the new governor for the way he is handling the state's financial crisis.

California's expected shortfall through June, 2005, is nearly $30 billion. A loan of $14 billion will come due next June, and as of now, the state does not have the money to pay for it.

Governor Schwarzenegger, a Republican, has urged long-term borrowing of $15 billion to help resolve the immediate crisis. But he failed to reach agreement with the Democratic-controlled legislature before a deadline last Friday. Democrats want a shorter loan and oppose a spending cap that the governor is proposing. The deadline could be extended if the two sides reach an agreement, but legislators say they remain far apart.

Mr. Schwarzenegger places the blame on the Democrats, and Los Angeles Mayor Hahn agrees with him. "You know, I'm a Democrat. The people on the Democratic side of the aisle are basically putting cities and counties in the room as hostages and saying we want to not take care of you because we want the governor to do other things," he said. "I don't think that's right."

When he reduced the car tax, Mr. Schwarzenegger insisted that cities and counties would be compensated for the lost revenue. He says that's less certain now, and he blames the legislature.

Los Angeles city council member Antonio Villaraigosa, a Democrat and former speaker of the California assembly, says both sides are to blame for the crisis, and both sides should work together. "Stop the finger pointing. It takes two to tango. It takes two to come to a resolution. They both have to work it out," he said.

Mr. Schwarzenegger is also considering a suspension of a state provision that requires 40 percent of the California budget be spent on education. Democrats complain that the governor's proposal gives him too much power to make budget cuts, and could lead to reductions in important social programs.