Governor Seeks Budget Reserve of $3 Billion

Gov. Gray Davis is seeking to raise the state’s budget reserve to around $3 billion--roughly triple the amount he considered prudent less than a month ago.

The governor’s desire for a more substantial rainy day account comes amid reports of softening state revenues and the repeal of federal estate taxes, which is expected to cost California coffers hundreds of millions of dollars.

Building a larger reserve, however, will force Davis and lawmakers to scale back spending on a vast array of programs and services or perhaps make deep cuts to a smaller number of them to balance the state’s 2001-02 budget.

Independent Legislative Analyst Elizabeth Hill has warned lawmakers that unless deeper, ongoing cuts are made to the governor’s revised budget, which carries a $102.9-billion price tag, state spending could overtake revenues by billions of dollars in the 2002-03 budget year.

With the threat of a deficit looming, the size of the reserve has become a controversial topic among lawmakers who are negotiating California’s next spending blueprint.

Republicans are calling for a cushion of at least $3 billion--about twice the amount that Assembly Democrats contend the state needs to bank.

Davis included a little more than a $1-billion reserve in the revised budget he released last month, but doubled the figure last week to $2 billion. He has since indicated to legislative leaders that he would like to see the figure grow closer to $3 billion.

Helping to fuel the governor’s decision to bolster the reserve is Congress’ repeal of federal estate taxes, a portion of which are diverted to the states. The change is expected to cost California $1.1 billion by 2005.

State finance officials also reported that May revenues were $66 million below what they had anticipated--a decline fueled by disappointing sales tax revenues.

The governor’s finance officials remained tight-lipped Wednesday as to what reductions Davis has in mind to build a bigger reserve.

“I hope they come up with a plan and if they do I hope it’s something that makes sense,” said Assemblyman Tony Cardenas, the Sylmar Democrat who chairs the legislative committee that is negotiating the budget.

“But I would be surprised if we can get there without a whole lot of pain,” he said. “I don’t have answers as to how you get beyond $2 billion.”

Senate Budget Chairman Steve Peace (D-El Cajon) said Wednesday that lawmakers and administration officials are continuing to negotiate the size of the reserve, among other issues. Neither he nor Cardenas ruled out the possibility that a larger reserve could prompt a reduction in the hefty amount that Davis is hoping to dedicate to bolstering education.

Lancaster Assemblyman George Runner, the leading Republican on budget matters in the lower house, said his colleagues are supportive of a bigger reserve, but fear that Davis’ latest goal is still not high enough given the economic uncertainties facing the state.

“He knows this is a challenging budget year,” Runner said of Davis. “But if he doesn’t go through some of these challenges now, next year is going to be even worse.”

Lawmakers are two days away from missing the June 15 constitutional deadline to approve the budget and send it to the governor. Cardenas has indicated he expects the Legislature will bust the deadline, but will have the document to Davis before the start of the new fiscal year, which begins July 1.