California Rejects Schwarzenegger's Budget Fixes

California voters resoundingly rejected Gov. Arnold Schwarzenegger's plan for plugging the state's budget deficit on Tuesday, voting down five of six ballot measures backed by the former action movie star.

"Tonight we have heard from the voters and I respect the will of the people who are frustrated with the dysfunction in our budget system," Schwarzenegger, a Republican, said in a statement issued after the polls closed Tuesday.

The only measure that passed is one that will block California state legislators, the governor, and other state elected officials from receiving pay hikes in deficit years. Though the measure, known as Proposition 1F, carried populist appeal, it will not generate much in the way of savings for the state.

The big-ticket items which went down to defeat on Tuesday included a two-year extension of higher sales, car, and income taxes. The defeated measures also included a plan to borrow from an expanded state lottery. To shore up the state's general fund, Schwarzenegger was also pushing a plan to divert tobacco taxes away from a special fund for children services and a 1 percent "millionaire's tax" away from a special fund for mental health services.

As a result of Tuesday's vote, the deficit in the nation's most populous state will now climb from $15.4 billion to $21.3 billion. Schwarzenegger, who has ruled out a new round of tax increases, said the state must now come together to make the hard choices needed to plug the state's gaping budget hole.

While Tuesday's vote will force Sacramento to grapple with a new round of spending cuts that the governor has said could include shortening the public school year by 7 days, cutting 200,000 children off state-subsidized health insurance, and shortening state prison sentences for up to 19,000 illegal immigrants, the state's politicos are also plotting a more fundamental reform of the budget process and governance structure.

One civic leader at the forefront of that effort is Bob Hertzberg, a former Democratic speaker of the California State Assembly who heads a reform group that calls itself California Forward. The group has laid out a series of steps it said would be a major government overhaul.

"We're not just rearranging the deck chairs on the Titanic," Hertzberg told ABC News. "Frustration is higher than it's ever been. California Forward is putting together a package of reforms. We're building support inside and outside of Sacramento. And our goal is to get it on the November 2010 ballot."

California leaders are weighing wholesale reform, according to Hertzberg, because Sacramento is facing a crisis of governance which extends beyond its current budget shortfall.

California Forward is seeking a series of revisions to the state constitution. Possibilities for the final package include:

Changing the state's vote requirement to pass a budget from two-thirds to 50 percent plus one.

Instituting multi-year budgeting while encouraging the legislature to engage in oversight during the off-year.

Reforming the state's tax system to make it more stable and business-friendly.

Implementing pay-as-you go rules.

Limiting the ability of Democrats to label higher taxes as fees.

Tightening rules on lobbyists.

Increasing the size of the state's rainy day fund.

Easing the state's term limits so that legislators could serve a total of 12 years in either the Assembly or state Senate.

Making the state's governor and lieutenant governor run together on the same ticket rather than being elected independently as they are now.

"If you look at the ying and the yang, and the checks and the balances of this stuff, there is some architecture here that is the basis for a deal," Hertzberg told the Sacramento Press Club recently.

California is one of 14 states to require initiatives to focus on no more than one subject. To get around this "single-subject rule," Hertzberg is selling his package to the state's legislative leaders as a constitutional revision.

The downside of this approach is that it must first receive a two-thirds vote of the legislature.

The upside, in Hertzberg's view, is that a constitutional revision can go to the voters as one package rather than as a series of individual ballot measures as was the case in Tuesday's special election.

"If these reforms go on the ballot separately, everyone is going to nitpick them apart," Hertzberg told ABC News.

The reforms being pushed by California Forward, which was headed by Leon Panetta until he was picked by President Obama to head the CIA, are far-reaching. But some of the state's politicos think they do not go far enough.

"You've got to open this whole thing up," San Francisco Mayor Gavin Newsom, a Democratic candidate for governor, told ABC News. "In 20 years, we've had 10 major budget deficits, not modest deficits, but major deficits over a 20-year period. That's a structural problem."

Rather than pursuing a constitutional revision of the type envisioned by California Forward, Newsom has joined the Bay Area Council, a business group, in saying he would like the state to convene a constitutional convention that would re-examine the mandatory spending and tax limitation provisions that have been written into the constitution by previous ballot measures.

He also would like to see the state change its two-thirds vote requirement on tax increases. He will not say, however, whether the new threshold to raise taxes should be 51, 55 or 60 percent, saying that to prescribe the outcome before a convention began would prevent it from achieving the type of broad-based support it would need to succeed.

"I support bringing both down," said Newsom referring to the current two-thirds vote requirement on the budget as well as the two-thirds vote requirement on taxes. "Look, the whole idea that we're two-thirds is perverse. Two-thirds hasn't worked. It hasn't changed our profligate ways."

"If its intention was to actually reduce the growth of government, it hasn't done that at all," he added.

Hertzberg of California Forward is not dismissing the idea of a constitutional convention. If his constitutional revision does not work, a properly structured convention may be necessary, he says.

He parts with fellow Democrat Newsom, however, on the question of whether the state will go along with lowering the two-thirds vote requirement on taxes.

"Our job at California Forward is to come up with ideas that don't just make us feel good but that can actually pass," said Hertzberg. "Folks of both parties don't like sending money to Sacramento."

ABC News' Elizabeth Gorman contributed to this report.