California budget woes may force government overhaul

By Jim Christie

SAN FRANCISCO (Reuters) - California's government may see a dramatic overhaul because its budget is in such disarray and on track for a staggering shortfall of at least $15.4 billion, lawmakers and analysts said on Friday.

Gov. Arnold Schwarzenegger called that deficit estimate "certain" on Thursday, warning the budget gap for the next fiscal year would swell to $21.3 billion if voters reject budget-related ballot measures in a special election on Tuesday.

Surveys suggest voters will reject the measures.

In either case, the most populous U.S. state faces sharply reduced spending, with Schwarzenegger, a Republican, seeking deep cuts in education and health and human service programs. Additionally, 5,000 state employees will receive pink slips and the state will need to borrow $6 billion with a revenue anticipation warrant.

Lawmakers responded with vows of fiscal austerity. But Assembly Majority Leader Alberto Torrico said a more dramatic effort may be needed.

"We are in dire need of streamlining," he told Reuters. "We should have a conversation about what our priorities are as a state. ... I don't think we can go through this budget and try to offend the least amount of people."

That marks a dramatic shift for the legislature's Democrats, who typically fight against spending cuts, said Bill Whalen, a research fellow at the Hoover Institution and former speechwriter for former Republican Gov. Pete Wilson.

Republicans likewise must make a bold gesture, Whalen said, noting they could back new revenues despite their anti-tax pledges and over Schwarzenegger's opposition to tax increases.