California's budget deficit is expected to soar past $40 billion over the next year-and-a-half, the financial and construction industries have been decimated by the housing collapse and unemployment is on the rise.
Legislators have been at odds for months over how to close the gap, and state finance officials say California will have to start sending IOUs to state contractors and taxpayers expecting refunds next month if the budget is not fixed.
"The truth is that California is in a state of emergency. Addressing this emergency is the first and greatest thing we must do for the people," Schwarzenegger said during a short address to a joint session of the Legislature. "The $42 billion deficit is a rock upon our chest and we cannot breathe until we get it off."
The Republican governor warned that California, the world's eighth largest economy, faces insolvency within weeks if lawmakers fail to close the widening deficit.
The problem is so pressing that no other issue -- including education, water policy and health care -- can be addressed until the state's budget problems are resolved, Schwarzenegger said.
"Let me tell you, I have big plans for this state. They include action on the economy, on water, environment, education, and health care reform, government efficiency and reform, job creation, and the list goes on and on," Schwarzenegger said. "But our first order of business is to solve the budget crisis."
Schwarzenegger's address was unusual for its brevity, its lack of big ideas and even the time slot in which he scheduled it.
Governors typically use their annual address to the Legislature to lay out their major policy goals for the coming legislative session. In years past, Schwarzenegger has promoted bold initiatives that included a failed $14 billion overhaul of the health care market and a successful pitch for billions of dollars in infrastructure bonds.
This year's event was a spartan, daytime affair that lasted just 12 minutes. Schwarzenegger also dispensed with his typically lighthearted tone as he implored legislators to put aside their partisan differences.
After the speech, Schwarzenegger retreated to his Capitol office to meet with legislative leaders.
Closing California's deficit will include billions in spending cuts. Schwarzenegger has ordered state workers to take two days off a month without pay, starting in February, while departments have been asked to take 10 percent, across-the-board cuts.
Public works projects have ground to a halt because the state no longer has the money to pay for them, and teachers in some school districts have received layoff warnings as the state has run low on cash.
While Schwarzenegger spoke, dozens of disabled people and their supporters lined the sidewalk outside the Capitol, chanting "no more cuts, shame on you" to protest the governor's proposal to cut health care and human services programs.
"Our view is, we've given," said Marty Omoto of the California Disability Community Action Network, which organized the rally.
Their chants could be heard inside the Assembly chamber, where lawmakers, constitutional officers and first lady Maria Shriver had gathered to hear the governor's speech. Among those on hand was former Gov. Gray Davis, the Democrat ousted from office in the 2003 recall election that brought Schwarzenegger to power.
After the speech, Davis said Schwarzenegger was not solely to blame for the Capitol gridlock. He expressed hope that legislators finally have grasped the severity of the problem and would be able to pass a budget that addresses the short-term crisis.
"Shame is a powerful motivator, and I do not believe the state wants to issue IOUs to people looking for their tax returns," he said.
The sticking point in budget negotiations has been raising taxes. Schwarzenegger and Democrats have proposed raising a variety of taxes, but have not agreed on the form those should take.
The governor's latest budget plan proposes $17.4 billion in spending cuts, $14.3 billion in tax increases and $10 billion in borrowing to close the deficit through June 2010. He said all sides have to be willing to give up something so they can reach a compromise.
Republicans have refused any tax increase but have yet to show how they would cut $42 billion over the next two fiscal years to balance the budget.
Assembly Minority Leader Mike Villines, R-Clovis, stopped short of saying Republicans were willing to consider tax increases.
But he said he believes Californians would be willing to pay more if they saw the Legislature make deep cuts, genuine reforms and eliminate waste. He said the crisis presents a historic opportunity for Republicans, the minority party in both houses, to help shape California's future.
"We have a chance right now to do something that is significant, that is the type of reform that Republicans don't often get to be at the table to negotiate for," Villines said.
On Thursday, Schwarzenegger said lawmakers were engaged in "serious and good faith negotiations" but also criticized them. He said they were more devoted to party ideology than working for the people who elected them.
In the future, he said, lawmakers and the governor should not receive their salaries or per diem payments -- daily expense money -- for each day they miss the constitutional June 15 deadline for producing a budget. Schwarzenegger, who earned millions as a bodybuilder and Hollywood actor, does not take a salary from the state.
"If the people's work is not getting done, I think the people's representatives should not get paid either. That is common sense in the real world," he said.
California's lawmakers are the nation's highest-paid, making $116,208 in base annual salary. On top of that, they get $173 for daily expenses, collecting an additional $34,680 on average per year.
Davis, the former governor, said the governor's suggestion that the Legislature forgo pay and per diems when the budget is delayed was a good one -- and something both he and Gov. Pete Wilson had previously proposed.
Senate Minority Leader Dave Cogdill, R-Fresno, criticized the recommendation. He said legislators already have their pay suspended during a stalemate, which is fair.
"It just seems to me inappropriate to add a penalty just because it isn't out on time," Cogdill said. "Is that what the people of this state want? A budget that's out on time regardless of its quality? I doubt that."