Today, just three months after our February budget, we once again face a $24-billion deficit. California's day of reckoning is here. In order to deal with our ....

We are now back to the same level of revenues we had in 2003, and when you adjust for inflation and population, we are back to the level of the late '90s.

Now, as I stand here today, we are in the midst of the greatest economic crisis since the Great Depression. In the past 18 months one-third of the world's wealth has vanished. And because of that and because of California's outdated and volatile tax system, our revenues have dropped 27% from last year. And you can see this right here on the charts next to me; it's very clear.

But as you know, part of our budget agreement required us, by law, to go back to the people for approval, right at a time when the people wanted to send Sacramento a powerful message. And that message was clear: Do your job. Don’t come to us with those complex issues. Live within your means. Get rid of the waste and inefficiencies and don't raise taxes.

Today I want to talk about financial crisis. Three months ago the members of this body came together to set aside their ideological differences and did what they believed was best for California. We solved $36 billion of a $42-billion deficit.

First of all, I want to thank you for the gracious invitation to address you here today and to address the people of California.

Thank you. Thank you very much, Speaker Bass, Senate Leader Steinberg , Assemblyman Blakeslee , Sen. Hollingsworth , my fellow constitutional officers and my fellow servants of the people.

Following is the complete text of Gov. Arnold Schwarzenegger's budget speech to the Legislature this week, which his office also released as weekly remarks. An obvious attempt to save money:

...limited amount of money, I have proposed some dramatic changes in our May revision.

Those spending cuts represent much more than the hard decisions necessary to balance our budget. They represent the transformation of what services Sacramento can provide and how those services are delivered.

The immediate task before us is to cut spending to the money that is available to us. We have no time to waste. The controller has told us that we have 14 days to act or California is at risk of running out of cash. I've already used my executive authority to reduce the state payroll and I've proposed the necessary cuts to the three largest areas of our budget, which is education, healthcare and prisons.

I know the consequences of those cuts are not just dollars. I see the faces behind those dollars. I see the children whose teachers will be laid off. I see the Alzheimer's patients losing some of their in-home support services. I see the firefighters and the police officers who will lose their jobs.

People come up to me all the time, pleading, "Governor, please don't cut my program." They tell me about how those cuts affect them and their loved ones. I see the pain in their eyes and I hear the fear in their voices and I hear the demonstrations outside of our Capitol. It's an awful feeling, but we have no choice.

Our wallet is empty, our bank is closed and our credit is dried up. I know for many of you these will be the hardest votes that you will ever make. But the people sent us here to lead not only in times of prosperity but also in times of crisis.

We must make these cuts and live within in our means, because what is the alternative? If we don’t act, the state will simply run out of money and go insolvent. You see, we are not Washington. We cannot print our own money, we cannot run trillion-dollar deficits, and we can only spend the money that we have. That is the harsh but simple reality.

Now, at the same time, we cannot take this budget and make it just about cuts. There are also some great opportunities here for structural reform. Like Winston Churchill said, "A pessimist sees difficulty in every opportunity, but an optimist sees the opportunity in every difficulty."

So let's use this crisis as an opportunity to make government more efficient and to find innovative ways to stretch the taxpayer dollar. Can we not find a way to provide those services at a lower cost? For example, I've asked our State Board of Education to make textbooks available in digital formats.

Now, we expect the first science and math books to be digital by this fall. If we expand this to more textbooks, schools could save hundreds of millions of dollars a year, and that's hundreds of millions of dollars that could be used to hire more teachers and to reduce class sizes.

In so many areas of government there are opportunities like this for reform. All we have to do is go out and seize them. Spending on prisons has nearly doubled in the last five years. We spend $49,000 per inmate per year; the national average is only $32,000. Now, other states have privately run correctional facilities that operate at half of the cost. Why can't we?

We must also restructure the relationship between state and local government. We all hear from the local officials about the heavy hand of Sacramento. If we are providing fewer resources we have an obligation to cut most of the strings and mandates and to get out of the way.

Right now we are cutting billions of dollars from our schools, so shouldn't we give districts more freedom and flexibility and not tie their hands with strict rules like who is allowed to mow the lawn or fix the roof, or do the plumbing?

I’m also proposing once again to eliminate and consolidate more than a dozen state departments, boards and commissions.

These include the Waste Management Board, the Court Reporters Board, the Department of Boating and Waterways and the Inspection and Maintenance Review Committee and so on.

There is absolutely no reason to hold onto those redundant boards in the crisis. We should not, and I will not, cut a dollar from education or a dollar from healthcare or a dollar from public safety or a dollar from our state parks without first cutting the Waste Management Board and other boards like it. [Applause] Every dollar that we save from those boards and commissions is a dollar that can help vulnerable citizens.

I'm also proposing to sell off state property, because Sacramento should not be in the real estate business, especially when we are in a fiscal crisis like this. Now, I know that the money that we receive from this property won't go directly to the general fund; it will pay off debt. But that lowers our debt payment, which then does help the general fund.

Everywhere I go, I hear stories about families selling off their boats and motorcycles to make ends meet. They have garage sales, they have yard sales. They know that you don't have or keep a boat at the dock when you can't put food on the table.

All of these proposals I have talked about for years and yet they never got done. I remember in 2004, I talked about blowing up the boxes and consolidating agencies. But now we are here in a crisis.

Then we had the revenues go up and we had the economy come back in a big way, so we couldn’t get it done. Now we're in a crisis and we are running out of excuses and we have run out of time. And the people have run out of patience.

Early this year we began consolidating all of our IT departments. My proposal to consolidate all of our energy functions is in the legislation before you right now. So is a proposal to consolidate the departments that oversee financial institutions, and I will soon send you legislation to merge our tax-collection operations.

These are all actions that we here can take, on our own, to save money and to make government more efficient, and we don’t have to bother the people with those things and we don't need permission from the federal government.

Now, I know that Sen. Steinberg is talking about reforming and restructuring the relationships between the state and local government, and Sen. Hollingsworth and the Republicans have some great ideas about performance-based budgeting. And in July, we should receive the bipartisan recommendation from our tax-modernization commission.

This will be a tremendous opportunity to make our revenues more reliable and less volatile and to help the state avoid the boom and the bust budgets that have brought us here today. Let's all work together on all of those issues and make it happen.

I don’t expect every single one of those reforms to happen within the next 14 days, but we can certainly get them done before this party adjourns for summer recess on July 17.

Now, there are other big reforms that I continue to believe in very strongly, like a spending cap and the rainy-day fund in order to further stabilize our revenues, but I’m not going to talk to you today about that because those reforms require voter approval.

As we all have learned just a few weeks ago, the voters will never trust us on those big issues until we show that we can do our job in this Capitol and make the tough decisions.

There is no doubt that the challenges before us are enormous. They will test our will. They will test our resolve. They will test our leadership. Many of those things that I’m proposing are despised by the special interests that rely on the status quo, and we are all too familiar with the interest groups and their army of lobbyists. But let’s not forget, it is our job. We have been sent here to Sacramento to lobby on behalf of the people and on behalf of the great state of California.

So in the coming days and weeks, the entire nation will be watching how we react and respond to this crisis. Last week Paul Krugman from the New York Times wrote that California is at a state of paralysis and that our political system has failed to rise to the occasion.

People are writing California off. They are talking about the end of California dream. They don’t believe that we in this room have the courage and the determination to do what needs to be done, or that the state is even manageable.

Let’s prove all the pundits wrong. Let us use this crisis as an opportunity, as an opportunity for great changes, lasting changes. Let’s not think just in short term; let’s think big; let’s think outside the box. Let’s think long-term and lay a new foundation for California’s future.

Let’s meet those challenges head-on without gimmicks. I don’t want to hand these problems to the next governor, and I know that you don’t want to hand them to the next Legislature.

So I have faith in all of you. I have faith in our ability to once again come together for the good of our state.

So I say let’s move forward and put California back on the path to prosperity. Thank you very much. Thank you. ###

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Photo credits: Associated Press; "Kindergarten Cop" (Governor reacts to news of updated budget deficit numbers).

