CAN ARNOLD MUSCLE ASIDE FISCAL DEMONS?

Byline: Tom McClintock  Local View

THERE'S an old saying that comes to mind when reading Gov. Arnold Schwarzenegger's budget: ``When you're up to your eyeballs in alligators, it's hard to remember that you came to drain the swamp.''

The practical application of that adage will define the success or failure of this administration and, with it, of California.

The fatal mistake would be to believe that the most important budget issue facing the administration is the 2004-05 budget. It is not. A much more critical issue is whether and how fundamental reforms enacted this year will decisively shape future budgets.

The governor is right to single out uncontrolled spending in defining the state's deepening deficit, but it is merely a symptom and not the cause. The root of California's spending problem is the way in which the state applies its resources. Whether this administration and the Legislature will concentrate on fundamental changes in the structure and delivery systems of the government that will produce vast budget savings in future years is - or at least ought to be - the central budget question this year.

This is not to excuse the borrowing and bookkeeping gimmickry in the 2004-05 budget. Ironically, it doesn't meet any of the tests of the so-called Balanced Budget Amendment the administration is sponsoring as Proposition 58 - which may explain why that proposal contains more escape clauses than Britney Spears' wedding vows. The budget is not balanced. Indeed, when the bookkeeping gimmicks are unraveled, it spends at least $3.5 billion more than incoming tax revenues.

It does not forswear borrowing. Indeed, it relies on exactly the same sort of loans that the former governor used to get into this mess - although in smaller amounts. It does not contain the required 3 percent reserve. Indeed, the budget reserve is less than 1 percent - and half of that is borrowed.

That's just the beginning, but it's also beside the point. The real fiscal battle is over future budgets.

Every year, the difficult, complicated, controversial long-term reforms that are vital to restoring the state's financial health are pushed aside in the frantic scramble to pass a quick-fix, get-out-of-town-alive budget. It is a siren's song that has seduced and wrecked previous administrations, and the governor should keep his bearings fixed on how reforms adopted this year will affect all of his budgets to come.

To that end, the governor has outlined a series of sweeping changes in the fundamental structure of the government. They have received scant attention in the pundits' race to dissect budget numbers - but they are the most profound and far-reaching parts of the proposal, and if they are adopted this year, all of the infirmities of his 2004-05 budget will soon be forgotten.

The centerpiece of Schwarzenegger's State of the State address was his proposal for a Performance Review Commission. The recommendations of previous commissions have simply been ignored, but if a commission is given real teeth to affect the organization of the bureaucracies - ``blowing up boxes,'' as he put it - it promises to be one of the most significant reforms in two generations.

But that's just the start.

The governor has also proposed a constitutional amendment to provide for the contracting out of state services, he has demanded real workers' compensation reform, and he has taken the first steps to bring California's welfare rules into conformity with the federal Welfare Reform Act. He is pushing to transfer funds from the sinkhole of school finance - categorical programs - directly into the classroom and to restore management of those funds to the people directly involved in classroom instruction.

He can go even further.

Replacing the Healthy Families Program with a prepaid, refundable tax credit would provide far broader coverage at far lower cost than the expensive bureaucratic model now in place. Implementing a bounty program for private auditors to expose fraud in the Medi-Cal system would succeed where internal audits conducted by the bureaucracies have failed. The total savings - and improved services - inherent in these reforms would make balancing future budgets much easier.

But enacting them in time for next year's budget is the most difficult and demanding task that any California governor has faced in nearly a century. His public comments show Schwarzenegger understands this. Judging from his actions to date, one can believe he has the singular determination and focus to succeed.

And once the swamp is drained, the alligators will go away.