The budget proposed by Gov. Arnold Schwarzenegger today will take $1.3 billion of property tax from local governments to offset the state's obligation to pay for schools, sources said Thursday.
The proposal would closely resemble the property tax shift that occurred in the early 1990s and has been a sore point in the state's relationship with local governments ever since.

Schwarzenegger's first budget proposal, which he will send to the Legislature at 11 a.m. today, also will call for suspension of Proposition 42, a constitutional provision that diverts sales tax on gasoline to transportation projects, sources said.

That step, taken in the last two budgets, would free up $1.1 billion for the state's other obligations by reducing money available for transportation projects.

The GOP governor also will propose moving elderly Medi-Cal recipients into managed care, setting up premiums for some Medi-Cal benefits not required by federal law, and reducing pension benefits for new state workers, sources said.

Schwarzenegger, faced with an ongoing annual mismatch between revenues and spending of about $14 billion, has consistently vowed not to raise taxes. That left him the options of spending cuts and other measures, such as putting off costs.

Together, the governor will offer cuts and deferrals totaling $11 billion, sources familiar with the budget said Thursday. It is unclear how the rest of the budget gap will be reconciled, but Schwarzenegger is expected to rely on higher revenues from tribal gambling operations and an improving economy.

The proposal to take $1.3 billion from local governments is likely to generate controversy.

Schwarzenegger won praise from cities and counties when he unilaterally authorized payments to local governments to make up for the revenue they lost when he rolled back the state vehicle license fee increase upon taking office in November. The payments in the current fiscal year total $2.6 billion, much of which is used for police and fire protection and other local services.

The governor proposes to divert $1.3 billion from local property taxes to schools, thereby reducing the state's obligation, sources said.

"That would be a bad thing," said Pat Leary, a lobbyist for the California State Association of Counties, after being told about the proposal. She noted that property tax pays for many of the same services funded by the vehicle license fee.

"My immediate reaction is, what?" said Geoff Davey, Sacramento County's chief financial officer. "It would be a tremendous shell game if the vehicle license fees were restored but property taxes taken away."

Sacramento Mayor Heather Fargo, told of the proposal, responded, "I hope it is not true. This certainly emphasizes the need for the initiative to protect local revenues."

The California League of Cities and the California State Association of Counties are trying to put an initiative on the November ballot that would require voters to approve any shift of local sales and property taxes to the state.

Much of the budget ax is expected to fall on health care and social services, and sources detailed some of these proposed cuts Thursday.

In one provision of Schwarzenegger's plan, elderly and disabled people who get Medi-Cal would be moved into managed care plans instead of the state paying fees to medical providers that the recipients choose.

In some counties, all Medi-Cal recipients are already in managed care plans, but others make it optional for the elderly and disabled. A 2002 publication by the nonpartisan Legislative Analyst's Office estimated the potential savings of changing the medical plan for 1 million beneficiaries at $140 million.

Some health care advocates argue that it would be hard to realize those savings without reducing medical treatment for a population that depends heavily on it.

Schwarzenegger is expected to propose establishing a premium for some Medi-Cal recipients who get benefits not required by federal law.

One controversial health care cut will be the rate the state pays to Medi-Cal providers. The budget signed last summer cut that rate by 5 percent, and Schwarzenegger recently called for another 10 percent cut.

But on Dec. 23, a Sacramento federal judge blocked the 5 percent cut, saying the state had failed to take the steps required under federal law to justify it.

Still, Schwarzenegger's proposal counts on savings from the two provider rate cuts. Together, the reductions would save the state about $700 million.

A $400 million cut in the Department of Corrections relies on unspecified reforms in how the prisons are run, sources said. It counts on the state renegotiating its contract with the California Correctional Peace Officers Association. Other state worker unions renegotiated their contracts last year to help balance the budget.

It was widely known that Schwarzenegger had reached an agreement with education groups to provide only half of the $4 billion increase they are expected to be owed in the coming fiscal year under Proposition 98. The 1988 initiative guaranteed school spending would get a growing amount of revenue each year from the state and local property taxes.

On Thursday, Schwarzenegger and state education leaders released details in a news conference at Sutter Middle School in east Sacramento, where he also toured a computer room and chatted with students.

"During my campaign, I said many times that our children should always have the first call on our treasury," Schwarzenegger said

Scott Plotkin, executive director of the California School Boards Association, said the deal made sense, in part, because "we were getting indications that the legislative leadership was prepared to take all ($4 billion)."

Under the deal, subject to legislative approval, the K-14 education system would receive much of its $2 billion portion as discretionary funds that could be used for salaries or any educational program. The K-12 system would get about $1.8 billion, and community colleges would receive $200 million.

Sources said Thursday that the governor's proposal would defer payment of an additional $1 billion that the state owes schools for the current and previous fiscal years -- the difference between what the state budgeted and the amount it later determined it was required to pay under Proposition 98.

Community college fees would increase from $18 to $26 per unit under the governor's proposal, sources said. Lawmakers who have advocated such a move in the past argued the cost for low-income students would be more than offset by new eligibility for federal aid.

Fees at the University of California and California State University would rise 10 percent for undergraduates and up to 40 percent for graduate students.

By law, the state is not allowed to reduce pension benefits already granted to current state workers. But Schwarzenegger will propose offering new workers reduced benefits, sources said, similar to those in place before the Legislature sweetened pensions in 1999.

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Budget highlights
Among the items expected in the state budget proposal today:
* A $1.3 billion shift of property taxes away from local governments to offset the state's obligation to pay for schools.

* A diversion of transportation funds by suspending Proposition 42, which dedicates sales tax on gasoline for projects.

* A $400 million cut to prisons, in unspecified reforms and wage concessions that must be agreed to by the correctional officers union.

* A community college fee increase from $18 per unit to $26. Fees at the University of California and California State University would increase 10 percent for under-graduates and up to 40 percent for graduate students.

* Establishment of premiums for Medi-Cal recipients for some benefits not required by federal law.

* A $2 billion reduction in the $4 billion increase schools would be entitled to under Proposition 98. Another $1 billion owed to schools this year would be deferred.

* Return to a two-tier pension system for state workers, offering less lucrative benefits to new hires.

Source: Bee research, Governor's Office