Record Davis Budget Relies on Continued Prosperity

By DAN MORAIN

Jan. 11, 2001 12 AM PT

TIMES STAFF WRITER

SACRAMENTO —

Convinced that California’s economy will continue to grow, Gov. Gray Davis offered a record $104.7-billion budget Wednesday that would expand the junior high school year, give people a back-to-school sales tax holiday on clothes and computers and earmark $1 billion for the energy crisis.

Davis, appearing fatigued after spending the night in Washington working on solutions to the state’s electricity crisis, called his proposal for the 2001-02 fiscal year “responsive and responsible.”

While Davis said he expects the state economy to moderate, he is relying on economic forecasts showing continued growth in jobs and wages--and the boost in tax payments they will give Sacramento.

Although he called the energy expenditure one of the “linchpins” of the budget, the Democratic governor did not offer many details about how he wants to spend the $1 billion.

The spending plan, which requires legislative approval, includes only modest tax cuts, Finance Director Timothy Gage said, and tuition at state colleges and universities would be unchanged.

But the budget would boost state spending on public schools by $3.2 billion, expand state-funded health care to include low-income working parents and grant increases for transportation and the environment. The spending plan includes a $1.9-billion emergency reserve.

“You’re talking to someone who is always looking for the other shoe to drop,” Davis said, defending his belief that the state economy will expand, despite rising energy prices and warnings of a national recession. “We will not have a $10-billion surplus, but we will have more jobs and more revenue than we did last year.”

In the first two years of his tenure, Davis reveled in surpluses that topped $10 billion. The windfalls were fueled by taxes paid on stock options and stock market gains. Even as Davis and the Legislature cut taxes by $3.9 billion, spending rose 37% during the two-year period.

State Department of Finance experts believe that the volatile stock market will result in a 10% reduction in stock options and other capital gains Californians receive in 2001.

Still, the state will have a surplus of about $6 billion spread over this year and next, the Department of Finance predicts. The new budget is expected to rise by 4% from the current year’s $100 billion.

The governor said some of his proposed energy spending would be on incentives to people and businesses for trading in old refrigerators and air-conditioners. He also may push for state purchase of power in long-term contracts or help prop up utilities’ credit so they can buy power from wholesalers.

“This is a moving target,” Davis said, adding that he expects to reach an agreement with lawmakers on a plan to resolve the issue “in the next three to six weeks at the outside.”

Senate Budget Committee Chairman Steve Peace (D-El Cajon), while terming Davis’ budget responsible, called on him to double the spending on energy. Peace wants the state to spend $2 billion to begin buying power plants and building new ones.

“The energy issue has the potential for more cash demands,” Peace said Wednesday.

The California Constitution requires that the Legislature approve the budget by a two-thirds majority. With Democrats holding strong majorities in both houses, Davis is likely to win approval of the spending plan by the July 1 deadline.

As lawmakers were absorbed with the state’s energy situation, there was muted reaction Wednesday to a plan that most do not have to focus on until spring. “Some of what the governor wants will be out, and some of what we want will be in,” said Senate President Pro Tem John Burton (D-San Francisco).

Community colleges lauded the plan because it includes $62 million in pay raises for part-time teachers. AIDS activists called for more spending to combat HIV. The influential California Retailers Assn. announced its support for the sales tax holiday Davis proposed on computers and clothing in the last weekend of August. However, Burton noted that everyone, no matter their wealth, would get the break.

“I’m not crazy about it,” he said.

Tax cuts are sure to be a focus of the debate. Republican lawmakers have called for cuts of more than $3 billion.

One focus will be on sales taxes. Because of record surpluses, a 1991 law was triggered requiring a cut in the sales tax by a quarter percent this year, saving people an estimated $1.1 billion. Under that 1991 statute, the sales tax will rise again in 2002 if the economy slows. Republicans and many Democrats say they will press for a permanent reduction in the sales tax.

“Unless there are more tax reductions, it will be very hard to find Republicans to vote for this budget,” said Assembly GOP leader Bill Campbell of Villa Park said.

At a minimum, he said, Republicans are demanding that the sales tax not be raised in 2002--an election year.

Democrats will likely push to extend for another year tax breaks that Davis proposed last year for low-income homeowners and elderly or disabled renters. Peace estimated that the program would cost $300 million to continue at its current level.

Davis’ largest proposed cut would raise a credit for manufacturing firms that buy new equipment, saving them $70 million above the $420 million in credits they otherwise would receive. He also is proposing a $6.3-million tax break for companies involved in commercial space launches.

Among the new cuts, Davis is offering employers credits for loaning employees proficient in math to teach in public schools and for paying for employees’ transit passes.

Finally, on Davis’ proposed cut in the state sales tax for anyone--regardless of age or income--who buys clothes or computer equipment at the end of August, counties and cities would have the option of eliminating local sales taxes during that weekend.

Under Davis’ proposal, similar to ones in eight other states including Texas, people who make purchases of as much as $200 on clothes, or $1,000 on computer equipment, would pay no sales taxes. There would be no limit on the number of purchases.

“This is a way to help families that are sending their children back to school,” Davis said. “They have to buy clothes. It was a way to give them a break.”

Like many of Davis’ proposals, the tax break would be a one-time event. He did not propose making it an annual reprieve.

“I like the idea, of course. It was Gov. Bush’s,” Campbell said, noting that Texas created such a holiday when President-elect George W. Bush was governor there. “He put it in place in 1999. And he made it permanent.”

Schools remain Davis’ main focus. He proposes to boost state spending on schools by $3.2 billion, to $32.6 billion. Per student spending would rise to $7,174, an $866 boost over the current year, and a $1,418 increase since Davis took office in 1999.

The most ambitious schools initiative is a $100-million program to extend the length of the junior high year from the current 180 days. Over a three-year period, the year would be expanded to 210 days, at local districts’ option.

Davis also is calling for $830 million spread over three years to provide training in math and language for all 250,000 public school teachers, and $30 million to attract and give raises to algebra teachers.

He is earmarking $40 million to test touch-screen voting in three counties. The counties have not been selected.

And Davis proposes that the state spend $4 billion on road and mass transit construction, a boost of $834 million from the current year, plus $2.6 billion to assist local governments with transit projects. Some other areas include:

State universities: The budget provides $861 million for construction at state colleges and universities. The biggest item is $158 million to begin construction at the new University of California campus at Merced, even though the state has not yet obtained all environmental permits. Additionally, there would be money to upgrade the veterinary school at UC Davis to ensure that it remains accredited.

Davis, who last year earmarked $75 million to create three science and technology institutes at UC campuses, wants to spend $33 million to open a fourth institute at UC Berkeley, focusing on high technology.

Health and welfare: For the first time, Davis is agreeing to spend California’s annual share of the 1998 national tobacco settlement--$468 million--on health programs, boosting by $20 million efforts to combat smoking among teenagers, and expanding a program that provides health care for children to include their parents.

Davis would expand Healthy Families by $201 million to provide coverage for 174,000 low-income parents. Parents in four-member families earning less than $42,000 would qualify.

The federal government is expected to share the cost. While the Clinton administration has advocated the expansion, it is not known whether President-elect Bush supports spending the money.

State Health and Human Services Secretary Grantland Johnson is scheduled to fly to Washington today to work out details of the state’s request. He said he is confident it will be approved.

Davis wants to increase the number of children covered by the program to 561,000 by 2002, a jump of 106,000. Seven million Californians lack health insurance, including about 2 million children.

Welfare payments would increase to $676 a month for a family of three in urban areas, from the current $645, under the governor’s budget. Disabled people would see their benefits monthly check rise to $747, from $712.

Times staff writers Julie Tamaki and Miguel Bustillo contributed to this story.

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Gov. Davis’ Spending Plan

Education (K-12): $32.6 billion

Health and Human Services: $21.6 billion

Higher Education: $10.3 billion

Prisons: $5.4 billion

Tax Relief: $3.1 billion

Other: $2.7 billion billion

Resources: $2.5 billion

Business, Transportation and Housing: $1.9 billion

Courts: $1.5 billion