As if the state budget crisis needed to be any more complicated, now the federal government has been dragged into the middle of the state’s ongoing fiscal battles. If you thought the last budget standoff was rough, just wait and see what happens now that the state’s $20 billion budget problem has gone three-dimensional.

In essence, Gov. Arnold Schwarzenegger needs permission from the federal government to cut billions of dollars from the state budget. The governor outlined his proposals in a quickly-assembled budget revision last week, complete with deep cuts to education and health and human services.

But to make the cuts he wants, Schwarzenegger will need permission from the Obama administration – and secure that permission over the objection of state Democratic leaders.

While the governor was in Washington this week to be toasted as an environmental champion, he also met with the state’s Congressional delegation and Health and Human Services Secretary Kathleen Sebelius to discuss the governor’s proposed $750 million in cuts to the Medi-Cal program. Schwarzenegger is seeking a waiver from the Obama administration, and possibly a change in federal law, so that the cuts would not imperil hundreds of millions of dollars in federal matching funds for Medi-Cal.

The proposed cuts are sure to be a centerpiece of the budget fight to come between the administration and Democratic leaders. And now, President Obama and House Speaker Nancy Pelosi find themselves in the center of the state’s toxic budget process.

The federal government has already been dragged into the state’s nasty budget fight. Earlier this year, federal officials ruled that the state was at risk of losing billions in federal stimulus funds for cutting salaries of home healthcare workers as part of the budget package approved by the Legislature and signed by Schwarzenegger in February. The Schwarzenegger administration has challenged that finding, and they say they are awaiting final word from the administration on how to handle the salary issue. Ultimately, the administration sided with the governor.

But Schwarzenegger is certainly proceeding as if he will get the right to make those cuts.

The governor proposed further cutting salaries of home health care workers, reducing wages to the state’s minimum wage of $8 per hour, saving the state an estimated $114 million. That money could technically be made up by the counties, but counties will be struggling to make up their own budget deficits.

The governor said the cuts were necessary to balance the state’s books. “The state cannot afford its Medi-Cal program as currently structured and governed by federal rules,” reads a statement from the Schwarzenegger administration outlining its new budget plan. Schwarzenegger claims the federal rules place “limitations on the state’s ability to contain Medi-Cal costs.”

But Assembly Speaker Karen Bass, D-Los Angeles, said Wednesday she would oppose any effort to make deep cuts in Medi-Cal eligibility.

“I certainly wouldn’t want to do that right now,” she said, when asked about the federal waiver.

Beth Capell, a lobbyist for Health Access, said she was confident the federal government would not allow the governor to make the cuts he’s seeking. “The Obama Administration has repeatedly ruled that eligibility cannot be cut,” she said. “The cuts the governor is talking about would eliminate low-income families from Medi-Cal and eliminate eligibility from Healthy Families,” the state and federal program that provides health insurance to children in poverty.

The administration has not yet laid out the details of the proposed cuts, but administration officials say they would have to make cuts to eligibility.

“In order to achieve the savings, we are going to need cooperation and collaboration from the Obama administration,” said Department of Finance spokesman H.D. Palmer.
Details of just what will be cut remain a bit unclear, but administration sources say generally that they expect eligibility and benefits to be limited in the next state budget.

Medi-Cal is just one of the areas where the state is scrambling to hold on to federal dollars. Palmer says the state has already resubmitted its paperwork for federal stimulus dollars for education programs to allow the state to make additional cuts to K-12 programs this year. In short, the federal government is requiring states to provide services at least at the level that they did in 2006 in order to be eligible to receive federal stimulus dollars. When the governor proposed his revised May budget plan, with an additional $3 billion in education cuts, they also resubmitted paperwork to the federal government essentially lowering their dollar figures for how much was going to education in 2006.

By lowering that 2006 number, the state has more leeway to make cuts to education programs without fear of losing federal matching dollars.

But getting those cuts through the Legislature is another issue altogether.

Already, the teachers unions, some of which joined the governor in supporting the measures on the special election ballot, have filed a lawsuit against the administration demanding billions in state funding that they say is guaranteed to them under Proposition 98. The administration has said it does not believe schools are legally entitled to that money necessarily, and that the state may have more leeway to make cuts to the K-12 budget.