California Faces Drastic Steps to Fix Budget Deficit

California Gov. Arnold Schwarzenegger delivers his annual State of the State address Tuesday, in the middle of a worsening financial situation for the Golden State. The governor has said he will propose deep budget cuts Tuesday and declare a "fiscal emergency" within a month.

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MICHELE NORRIS, Host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.

ROBERT SIEGEL, Host:

And I'm Robert Siegel.

California is facing a huge budget deficit, more than $14 billion - partially, a byproduct of the state's sagging housing market. As a result, the state may have to take some drastic steps to pay its bills. And today, Governor Arnold Schwarzenegger lays out his plans in his yearly state of the state report to lawmakers.

NPR's Richard Gonzales joins us now from Sacramento with a preview. And Richard, 14 billion sounds pretty big. Just how bad is this California budget crisis?

RICHARD GONZALES: Well, you know, as he begins a fifth year in office, Governor Arnold Schwarzenegger is facing the same massive budget problems that devastated the man that he replaced, and that was Democrat Governor Gray Davis. Now, if you'll remember, Davis was forced out of office in a recall election then because - and Californians were so angry about the state's financial crisis. Schwarzenegger came in on his white horse promising solutions, and the economy did improve here for a while due in large part to the state's soaring housing market.

But as we both know, those days are history, and the governor has been reluctant to make any new major tax increases. And now, he's faced with a mess that won't be very easy to fix.

SIEGEL: Hence, those drastic steps that we've heard about. Tell us about some of the possibilities.

GONZALES: Now, one proposal is opening the doors to the state's prisons and reusing about 20,000 so-called low-risk prisoners. There's also a call to reduce the number of parolees returned to prison every year for technical violations. The governor has also talked about leasing the state's lottery to a private company in exchange for a huge payment to the state upfront.

SIEGEL: Schwarzenegger is a Republican who works well with Democrats and he often says that that's an example for how Congress and the White House ought to work together in Washington. Any chance that there would be some rediscovered harmony in Sacramento over this budget crisis?

GONZALES: Well, I wouldn't bet on it. The Democrats are dug in against any big- spending cuts for things such as education. And the Republicans are stonewalling any, any talk of tax hikes. Now, the governor has talked about fixing the deficit with cuts and reforms, not with higher taxes. But he's likely to have big problems with the Democrats on that approach.

SIEGEL: But even if he changes his mind and sides with the Democrats on the issue of a tax increase, can the Republicans block such a tax increase in Sacramento?

GONZALES: Republicans are drastically outnumbered in the California Legislature but they still have enough votes to block any potential tax hike. And many of them are already very angry with Schwarzenegger because he has adopted so many Democratic proposals, and they essentially regard as a turncoat. They consider him a Democrat who just happens to be a Republican. So it's unlikely that those Republican lawmakers would suddenly have a change of heart and go along with whatever Schwarzenegger wants.

Meanwhile, the governor is planning to declare a fiscal emergency here in California which gives lawmakers here a lot of timetable for dealing with the crisis. The details of his approach will come out later this week when he lays out his budget plan.

SIEGEL: And as Schwarzenegger addresses lawmakers there today, any sign that he tried to hold on to some of his big plans for the coming year?

GONZALES: Well, the budget problems have forced him to scale back a lot of his big plans, his big ambitions. But one thing I think he'll try to hang on to is to renew his push for health care reform - health care coverage for millions of uninsured Californians. The governor is hoping that Democrats will stick with him on that. But many say that they won't if it means having to make big cuts in existing programs instead of raising taxes.

SIEGEL: Thank you, Richard.

GONZALES: Thank you, Robert.

SIEGEL: That's NPR's Richard Gonzales speaking to us from Sacramento, California where Governor Schwarzenegger will address state lawmakers about the state's budget crisis.

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