Seeking to close an $8.1 billion gap, Gov. Arnold Schwarzenegger on Monday unveiled a 2005-06 budget that would fund education, social services and health care programs at levels significantly below what current law requires. The budget contains no tax increases, but has nearly $3 billion in borrowing.

Schwarzenegger’s proposed $85.7 billion budget reflects an increase of $5 billion, or 6.8 percent, in revenues from last year and an overall spending increase of 4.2 percent, or $3.4 billion.

Nonetheless, the spending levels for K-12 education and various health and human service programs are billions of dollars less than required under previous voter-approved measures and state laws. Most notably, Proposition 98, passed by voters in 1990, requires that 40 percent of all revenues be set aside for K-12 education and community college spending.

Schwarzenegger didn’t outline a legal justification for the move, although his budget highlights refer to Proposition 58, which was passed by voters last March. It allows the governor to call a special session of the Legislature when the state’s expenditures exceed revenues.

“Of course we would like to spend more money on these important programs,” Schwarzenegger said. “But the various state spending formulas push our spending up $10 billion. It’s like every year we make $1 and have to spend $1.10. We have to stop this madness. We have to live within our means.”

Schwarzenegger ruled out using any tax increases to close the budget gap, saying “we have a spending problem, not a revenue problem. If we increase taxes, then those wealthy people will simply pick up and move to other states, like Nevada.”

Schwarzenegger’s budget makes substantial use of borrowing and funding shifts to close the gap.

The proposed budget takes $1.3 billion in funding targeted for transportation projects and funnels them into the general fund. It also makes use of $1.7 billion in deficit financing bonds left over from the $15 billion bond measure voters approved last March. And it counts on being able to issue nearly $1 billion in pension obligation bonds, despite a continuing court challenge. Local governments would also hand over $1.5 billion in property tax revenues to the state’s general fund, as agreed under Proposition 1A last November.

Schwarzenegger said that to reduce future budget deficits, it’s imperative that the Legislature pass his proposed constitutional reform that imposes across-the-board cuts in state spending if expenditures exceed revenues. Otherwise, he said he would take the reform measure to a special election ballot, sometime this summer.

Missing from Schwarzenegger’s budget is any reliance on Indian gaming revenues, which last year he counted on to provide up to $1 billion. Schwarzenegger’s budget director, Tom Campbell, said that he didn’t want to count on any revenues that may not come in. He said the state is expecting to collect about $34 million from Indian gaming operations in the 2005-06 fiscal year.

Schwarzenegger’s budget also does not indicate how much more revenues the state will be able to squeeze out of the federal government. California gets only about 77 cents back for every dollar it sends to Washington; Schwarzenegger has vowed to change that and even called himself the “Collectinator.”

The proposed budget cutbacks from required funding levels and fund shifts have already generated sharp criticism from education interests, social and health service advocates and others. They accuse Schwarzenegger of reneging on promises made last year that he would keep their budgets whole in the future. They also say Schwarzenegger is balancing the budget on the backs of the poor and those most vulnerable.

Nonetheless, Schwarzenegger said, “if we were to give the money to everyone, we would be billions of dollars in deficits every year. This is all the money we have.”