Bold Proposals in First Gov Speeches

California ­- where an epic struggle to avoid fiscal disaster continues — can turn itself around if lawmakers make sweeping changes to the state’s basic tax and budget practices, Gov. Arnold Schwarzenegger (R) said on Wednesday (Jan. 6).

“Here is what we need to accept: Our economy is 21 ^st century, but our tax system is 20 ^th century,” Schwarzenegger said, urging lawmakers to make election-year changes not only to the state’s tax code, but also to its budgeting and pension systems. California lawmakers were forced to cut $60 billion last year alone because of a ballooning deficit between expenses and revenues, Schwarzenegger said, punctuating the need for dramatic reform.

“Bold is what we do in California,” Schwarzenegger said.

Schwarzenegger and two other governors — Kentucky’s Steve Beshear (D) and New York’s David Paterson (D) — on Wednesday became the first to deliver state of the state addresses to their legislatures this year. All three used the occasion to push policy proposals aimed at helping their states gain jobs and emerge from fiscal crisis, with another difficult budget year ahead.

The Nelson A. Rockefeller Institute of Government reported Wednesday that state tax revenues declined for the fourth consecutive quarter. At the same time, demand for state services, such as health care for the poor, is rising sharply amid the recession. That imbalance is expected to result in a record third consecutive year of reduced state spending as lawmakers around the nation make deep cuts.

In cash-starved New York, Paterson delivered an unusually confrontational speech taking aim at ethics problems, legislative gridlock and excessive spending in the state legislature, tying all three to the state’s long-term fiscal health. Paterson (D) — who, unlike Beshear and Schwarzenegger, will face the voters in November — also renewed an unsuccessful push last year for a firm cap on state spending that would be tied to inflation.

“You have left me and other governors no choice,” Paterson said. “Whether it be by vetoes or delayed spending, I will not write bad checks, and we will not mortgage our children’s future.”

Paterson’s ethics proposals represent what The New York Times called “the most ambitious ever suggested by a sitting governor in New York, where ethics enforcement has historically been weak and limits on campaign cash are among the least stringent in the nation.”

Kentucky’s Beshear, who won’t face reelection until 2011, gave few specifics in his speech, but stressed the need to make government “smaller, leaner and more efficient” as the state continues to deal with budget difficulties. On Monday (Jan. 4), Beshear made his second round of cuts to the current budget, amounting to $108 million. The governor has cut the budget six times since taking office in 2008.

The nation’s attention, however, is likely to remain focused on California, which faces a fresh $20 billion budget deficit and whose fiscal problems are “in a league of their own,” according to a November report by the Pew Center on the States, of which Stateline.org is part.

Schwarzenegger, who is term-limited and gave his final state of the state speech, embraced the recommendations of a tax reform commission that, last September, suggested a dramatic shifting of the state’s tax code , including reducing personal income tax rates for all income brackets and eliminating the statewide sales tax. Schwarzenegger stressed that the state’s current personal income tax structure is unfair.

In California, “144,000 taxpayers pay almost 50 percent of all personal income taxes,” Schwarzenegger said. “Think about it. Thirty-eight million Californians have to rely on 144,000 people for their schools, their fire protection, their health care, their public safety and many other services. That makes no sense.”

Schwarzenegger also said the state’s pension obligations are akin to being “run over by a locomotive. We can see the light coming at us.” He proposed reducing the state’s share of pension promises going forward.

Besides pushing for changes to the state’s core fiscal practices, Schwarzenegger also pushed a plan to save or create at least 100,000 jobs by training workers, speeding up construction projects and offering tax credits to the rapidly expanding clean energy sector.

Beshear and Paterson also announced job-creation initiatives.

Wednesday’s speeches are the first in a season of gubernatorial addresses to lawmakers that will unfold over the coming months, and they suggest that more governors could propose major changes in state government as they confront another year of limited resources.

(For complete coverage of Wednesday speeches from local news sources, visit Stateline.org ‘s California , Kentucky and New York pages, or our Govs’ Speeches page . For the dates of all governors’ 2010 state of the state speeches, click here . For our archive of governors’ speeches going back to 2000, click here .)

Lawmakers in 36 states will return to work only to find deficits in their current budgets, according to a recent survey by the National Conference of State Legislatures , and at least 35 states will face shortfalls totaling $56 billion in the coming fiscal year, which begins in July in most states.

Indeed, next fiscal year could be even harder for state lawmakers because so many cuts already have been made. State officials, moreover, have been talking for months about the “cliff” they face when federal stimulus money runs out, and fiscal 2011 will be the first to put those fears to the test — particularly when it comes to funding for Medicaid, the joint-federal program that provides health care to about 60 million poor people.

About $87 billion in federal stimulus funds for Medicaid will run out in December, halfway through the next fiscal year, and Medicaid directors are deeply concerned that cash-strapped states will respond by shutting more poor people out of health care services.

– Stateline.org intern Jake Grovum contributed to this report.