California Governor Schwarzenegger Slashes Spending

Jane Wells
CNBC Reporter

As California faces a $24.3 billion deficit, Governor Arnold Schwarzenegger has ordered state agencies under his control to stop paying contracts signed since March 1st.

It's unclear how much the effort will save. There are plenty of exemptions. Goods and services already delivered will be paid for. Contracts considered necessary for public safety will continue. Also exempt are "projects funded by the American Recovery and Reinvestment Act, or projects funded by bonds, grants or projects specifically mandated by court orders, or public-private partnerships that require no direct state expenditures." There will also be a process to test if other contracts should be saved, because exempting them would mean "avoiding significant revenue loss; achieving significant net cost savings; maintaining multi-year IT system and service contracts approved by the Office of the Chief Information Officer; or providing critical services and functions."

The Governor is also asking state agencies not under his control, such as the legislative and judicial branches, and the state college/university systems, to implement similar cost-saving measures.

Governor Schwarzenegger has also ordered all state departments to submit plans to reduce future spending by 15 percent within 30 days of California adopting a revised budget which closes the $24.3 billion gap. The State Controller wants it done by Monday of next week, to give him enough time to sell investors on the idea of buying short-term warrants before the state runs out of cash July 29.

The Governor has made it clear he believes voters want to close the budget gap through cuts, rather than higher taxes or more borrowing.

Democrats, who control both legislative houses, may be breaking ranks with their biggest allies—the state employee labor unions. The Los Angeles Times reports that many Democrats are balking at raising taxes. Not one of them has signed a pledge card from labor unions promising to support up to $44 billion "in new or higher taxes on the wealthy, oil companies, tobacco and other industries, products and people".

"I am committed to ensuring California lives within its means and runs as efficiently as possible," said Governor Schwarzenegger in a press release. "With today's action, every state agency and department will scrutinize how every penny is spent on contracts to make sure the state is getting the best deal for every taxpayer dollar."

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