DEMS BLOCK ARNOLD GOVERNOR WANTS SPENDING-CAP MEASURE ON NOVEMBER BALLOT.

Byline: David M. Drucker and Harrison Sheppard Sacramento Bureau

SACRAMENTO - Legislative Democrats dealt Gov. Arnold Schwarzenegger his first defeat Friday night, as they shot down his fiscal recovery plan while failing to win approval for their own alternative.

The Legislature refused to approve Schwarzenegger's plan for a $15 billion bond and a constitutional spending cap for the March ballot. They proposed their own bond plan and spending limit, but were unable to muster Republican support for the needed two-thirds majority.

Schwarzenegger now intends to take the spending cap measure - one that could be even more strict than that which he proposed to the Legislature - directly to voters, leading a petition effort to get it on the November ballot without legislative approval.

``The governor's disappointed, yet firm in his resolve to follow through on his mandate to represent the people and to let the people have a say,'' said Rob Stutzman, Schwarzenegger's communications director. ``He's disappointed the Legislature would not even put his proposal on the ballot to let the people decide this coming March.''

Stutzman said the Legislature failed to grasp the message from the recall campaign, that the public wants the Legislature to end its ``addiction'' to overspending, so the governor will ``let the people give the addicts an intervention.''

Democrats said they thought the governor's bond plan was to be paid back over too long a period of time, saddling future generations with debt for the next 15 to 20 years or more. And they believed the spending cap was unnecessarily harsh, forcing serious cuts in programs for needy Californians even after the state's economy improves.

``My grandchildren are being asked to pay a debt that, whoever created it, they didn't create it,'' said Sen. Richard Alarcon, D-Van Nuys, the Senate's majority whip. ``It's unconscionable.''

Now to keep its books in order, the state will have to rely on a previously approved plan to borrow $10.7 billion in bonds, a plan that was approved by the Legislature earlier this year but which is expected to face a tough legal challenge. A separate bond for $1.9 billion was already shot down by the courts. Schwarzenegger's bond would have included the $10.7 billion and his advisers argue that its legality would be more certain because it would be submitted to the voters.

To put the bond and Schwarzenegger's proposal for a constitutional spending cap on the March 2 presidential primary ballot, the Legislature needed to approve both measures by a two-thirds vote no later than midnight Friday, a deadline set by Secretary of State Kevin Shelley. Past practice has allowed the clock to be stopped at one minute to midnight to let talks carry on through the night.

Negotiations had continued nearly around the clock all week, up until Schwarzenegger met with legislative leaders Friday morning. The talks died by the afternoon, Stutzman said, when Democratic staffers stopped returning the administration's calls just before the Legislature went into session.

By the evening, any pretense of bipartisan cooperation had collapsed, as both sides coalesced around hard positions and blamed the other for refusing to compromise. The Senate wrapped up its session by 10 p.m., failing to pass either plan as the Assembly continued to meet into the night even with the possibility for action lost.

``All I have to say to you Gov. Schwarzenegger is welcome to California,'' said a frustrated Assemblywoman Sarah Reyes, D-Fresno, who blamed Republicans for continuing partisan gridlock. ``Welcome to Sacramento, welcome to a place where partisan politics remains. Welcome to a place where business is as usual.''

``Retorted Assemblyman Russ Bogh, R-Yucaipa: ``The governor is watching tonight, but there's somebody else watching (California's voters). There's somebody else who a few weeks ago didn't just elect Gov. Schwarzenegger, (but) just a few weeks ago said to this Legislature, 'We've had enough of your shenanigans. We've had enough of your lies and we've had enough of your fiscal irresponsibility.' So what do you give them tonight? You try to fool them.''

Senate Republican leader Jim Brulte, R-Rancho Cucamonga, was so frustrated by the Democratic resistance that he had Senate Republicans vote against not only the Democratic proposal but against Schwarzenegger's proposal, vowing that they would bring a tougher measure directly to voters. He said Republicans had been willing to support the Democratic version of the bond measure if the Democrats had been willing to support the governor's spending cap.

Another major obstacle for Democrats was a provision in the spending cap that would have given the governor greater power to make midyear budget cuts. The Legislature would have to muster a two-thirds vote within 30 days to overrule his cuts, a shift in power that Democrats saw as overstepping the constitutional balance of power.

``This bill creates an inappropriate imbalance relative to gubernatorial power that is dangerous,'' said Assemblywoman Jenny Oropeza, D-Carson, the chairwoman of the Assembly budget committee that didn't allow the governor's bill to make it to the full Assembly. ``And certainly the elements which negatively impact education in our state are a serious, serious flaw with the bill.''

But Republicans said the Democrats were refusing to clean up a mess they created by overspending when the state's coffers were full.

``When this state had a $10 billion surplus, the Democratic speaker of the Assembly proposed a tax increase on sales ... because a $10 billion surplus wasn't enough,'' Brulte said. ``You bankrupted us.''

Earlier Friday, the governor took part in an afternoon rally in Tracy, a suburb just east of the San Francisco Bay Area that voted heavily for Schwarzenegger in the Oct. 7 recall but is represented in the Legislature by Democrats.

The governor wants to limit spending to the combined rate of increase in the rate of population and per-capita personal income. And Schwarzenegger wants such growth to begin from a number that is based on budgeted spending for the 2003-04 fiscal year - around $75 billion - which ends June 30.

According to a Senate Republican analysis of the Democratic counterproposal, spending in 2004-05 could hit $86.5 billion, even though the nonpartisan Legislative Analyst's Office projects state revenues of only $75 billion.

Republicans also contend that the Democratic plan would have allowed Sacramento to ``cap'' spending at a level that is based on projected revenue, not actual revenue - although Oropeza said the plan would force the state to either cut expenditures or raise taxes if revenue fell short of expectations and would preclude borrowing to bridge the difference.

Assembly Minority Leader Dave Cox, R-Sacramento, referred to the Democratic plan as ``smoke and mirrors.'' It was approved in the Assembly Budget Committee on a party-line vote, and received no Republican support. The Republican proposals, including Schwarzenegger's plan, carried by a Republican assemblyman, did not get out of committee.

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Senate Minority Leader Jim Brulte, R-Rancho Cucamonga, left, confers with state Senate President Pro Tem John Burton, D-San Francisco, at the Capitol in Sacramento on Friday.

Rich Pedroncelli/Associated Press