Davis Faces Budget Cuts, Report Says

The suffering of California’s high-tech firms is taking its toll on the fortunes of state government, according to the nonpartisan legislative analyst, who said Wednesday that the state budget surplus has shrunk by $3.4 billion.

To keep the budget out of the red, Gov. Gray Davis will have to slash his state spending plan, an unpleasant prospect for those who rely on state services and a politically dicey task for a governor facing reelection next year. Among the areas that could be hit are anticipated transportation projects and a program to extend health insurance to poor people.

Elizabeth Hill’s grim update on the state’s financial outlook complicates an already difficult situation for state officials trying to pay for services amid an extraordinarily expensive energy crisis. More than $6 billion has been drained from California coffers to pay for energy purchases. Hill’s assessment of the state economy and its effect on the budget does not take that money into account because it assumes that a bond issue, approved Wednesday, will repay the state’s general fund.

Should that fall through, her budget estimates would grow more dire.

Hill’s office previously estimated an $8-billion state surplus over this year and next. But California has been particularly hard-hit by the struggles of the state’s high-tech firms, which in recent years had fueled huge state tax receipts as employees cashed out stock options, said Brad Williams, senior economist for Hill’s office.

“This shouldn’t be too terribly surprising given the negative developments in the economy and the negative developments in the stock market,” Williams said. “The economic picture has changed significantly since January.”

In a letter to lawmakers, Hill said onetime and ongoing spending cuts will be needed to stave off a deficit that would occur if the governor’s spending plan were put in place. Under that plan, money would be spent faster than it would come in, according to Hill’s projections.

At the rate of spending contemplated by the governor’s current budget proposal, the deficit would hit $1.5 billion in the 2001-02 budget year and rise to $6 billion by 2002-03, Hill predicted. To avoid running into the red, Hill floated the possibility of $2.5 billion in onetime cuts in the next budget and an annual reduction of $1.7 billion through the 2002-03 fiscal year.

Department of Finance spokesman Sandy Harrison said the Davis administration would not comment on Hill’s projection Wednesday, adding only that the governor would account for updated revenue estimates Monday when he releases his revised spending plan.

But lawmakers are reacting with alarm and are vowing to cut whatever programs are expendable to avoid what some consider the worst alternative: a tax increase.

“That’s the last thing we want to do,” said Assembly Budget Committee Chairman Tony Cardenas (D-Sylmar). “It has crossed our minds. We do not like the fact that it has crossed our minds.”

Senate Budget Committee Chairman Steve Peace (D-El Cajon) said the nearly $5-billion shortfall that Hill predicts for the 2001-02 fiscal year is optimistic. He believes revenue actually could sink as much as $20 billion.

Peace said Hill appears to be projecting that revenue will begin to rebound toward the end of the year, but he predicted a continued decline as the economic downturn manifesting itself on Wall Street trickles down to Main Street.

“I think we are in for a huge problem and that assumes no impact from the energy stuff,” Peace said.

Though legislators appear most determined to avoid a tax increase, cutting services would represent a political challenge.

Peace suggested that up to $2 billion could be saved by delaying certain onetime transportation programs that have yet to get off the ground. He warned that a proposed expansion of the Healthy Families program, which provides health insurance to low-income Californians, could be in jeopardy.

Education funding in the upcoming budget year probably will still rise over the previous year, but fall short of the level contemplated by Davis in January by about half a billion dollars, Peace predicted.

Davis’ $1.45-billion, three-year plan to extend the middle school year has faced substantial opposition in the Legislature and may be rejected, which would relieve the need to cut other programs.

Without question, the biggest cloud hanging over the budget is whether the general fund will be repaid for billions of dollars in energy purchases--a possibility that is quickly dismissed in Hill’s analysis.

To avoid blackouts, California has been buying massive quantities of electricity since January because the state’s private utilities had become too burdened with debt to continue making purchases on the expensive wholesale power market.

Davis had planned to reimburse the budget with proceeds from a record $12.5-billion bond sale and that utility ratepayers would then pay off the bonds. But the sale has been delayed until August at the earliest, leaving a gaping hole in state coffers as lawmakers plan the budget.

Cardenas said it is likely that legislators will be forced to craft a two-tiered budget this year, one that assumes a bond sale is completed and one that prepares for the possibility it is not.

There are other uncertainties as well. Consumer activists say they are considering challenging the bond issue with a ballot measure--a threat that could further undermine confidence about the bond issue, and California’s financial health, on Wall Street. California’s credit rating has already been lowered by one credit rating agency because of concerns over repayment of the state budget.

If the bond issue does not go through, “then we have to make cuts everywhere,” Cardenas said. “Everything is up for grabs.”

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Times staff writer Dan Morain contributed to this story.