Gov. Arnold Schwarzenegger used his annual State of the State speech on Wednesday as a platform to propose sweeping budgetary and political reforms including capping state spending, privatizing the state's pension system and taking redistricting out of the hands of the Legislature.

"Last year, we stopped the bleeding," Schwarzenegger said, referring to the budget crisis that he inherited after taking over from former Gov. Gray Davis. "This year we must heal the patient."

He demanded a special session of the state Legislature to pass his proposals, and threatened to take his reforms to the people with initiatives on a special election ballot if it doesn't.

Schwarzenegger said he would introduce legislation that would "cut expenditures across the board when they grow above revenues." He did not specify whether this spending cap would be tied to the rate of inflation and population growth, as Orange County Republican Sen. John Campbell has proposed.

Despite the state's fiscal troubles, Schwarzenegger vowed not to raise taxes to close a projected $8 billion budget deficit. "We don't have a revenue problem, we have a spending problem," he declared. He is scheduled to present his 2005-06 budget to the Legislature next week.

Schwarzenegger also took on powerful state employee unions, saying he supports legislation by Assemblyman Keith Richman, R-Granada Hills, to shift the state pension system to a defined contribution system, like 401(k) plans in the private sector.

Otherwise, he said, pension obligations for state and local governments would continue to spiral out of control. "We need a public pension system that is fair to employees and taxpayers," he said.

Schwarzenegger further antagonized the state teachers union with a call for merit pay for teachers. "An educational system that rewards and protects a bad teacher at the expense of a child is wrong. And I intend to change that. This is a battle of the special interests versus the children's interests."

Schwarzenegger called for taking redistricting out of the hands of the Legislature and giving it to an independent panel of retired judges. Noting that not one of the 153 legislative seats up for election last year changed party hands, he said, "The current system is rigged to benefit the interests of those in office not the interests of those who put them there."

Schwarzengger also called for the elimination or reform of as many as 100 state boards and commissions, abolishing more than 1,000 political appointments. Among the commissions targeted for elimination: the Managed Health Care Advisory Committee, the Banking Advisory Committee, the Real Estate Advisory Commission, the Small Business Reform Task Force and the Inspection and Maintenance Review Committee.

In one of the few economic initiatives in the 30-minute speech, Schwarzenegger said he intends to propose legislation to eliminate regulatory and legal hurdles that can delay construction or increase costs of new housing.

Schwarzenegger also announced plans to boost the state's infrastructure, calling for the building of more roads and more power plants. But he did not specify how much additional money he intends to set aside in his 2005-06 budget for these projects.

He also proposed a prescription drug discount card that would be made available to nearly 5 million low-income Californians.

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