Davis Taps Reserve to Avoid Deep Budget Cuts

Gov. Gray Davis managed to avoid deep cuts to most programs with the revised spending plan unveiled Monday, but he may be gambling with California’s future fiscal stability by dipping into the state reserve to make ends meet this year.

In essence, Davis reached deep into the state government’s savings account, drawing $5 billion from the budget reserve even as California faces an unpredictable, expensive energy crisis.

“It was the obvious thing to do,” said state Sen. Steve Peace (D-Chula Vista), chairman of the Senate Budget Committee. “But I am afraid the obvious will set us up for huge future problems.”

Davis acknowledged the seriousness of his gambit when unveiling his spending plan to Capitol reporters Monday, but said the current economic downturn represented as good a time as any to spend down the reserve.

“That’s what reserves are for,” Davis said. “Reserves are for rainy days.”

Whatever the case, his decision is sure to spark a budget showdown with Republicans, who had been pushing for an expanded surplus balance this year because of concerns over the energy crisis.

“The governor has been unwilling to cut programs to match the revenues,” said Assembly Republican Leader Dave Cox (R-Fair Oaks). “If you were doing your [household] budget, this is not the way you would do it.”

California has already authorized more than $7 billion for electricity purchases this year to avoid blackouts. Davis’ budget assumes that a record $13.4-billion bond issue will repay state coffers and cover the cost of future electricity purchases. But the bonds cannot be issued for 90 days, and there is considerable uncertainty surrounding their sale.

Republicans are a distinct minority in the Assembly and Senate, but budgets require two-thirds passage in both houses of the Legislature, giving GOP lawmakers significant negotiating power this time of year.

Cox called the reserve level proposed by Davis “dangerously low based upon the kind of [electricity] prices we have in California” and vowed to make increasing it a top priority in budget deliberations. Republicans recently called for a general fund reserve of 5%, or about $4 billion.

Ironically, Davis may face pressure from within his own party to use up even more of the reserve, as Democratic lawmakers push programs to improve the state’s foster care system and a host of other legislative priorities. Davis had not been planning to carry a large reserve even before the energy crisis and the economic downturn combined to worsen the budget outlook. When he unveiled his initial budget proposal in January, Davis proposed a $1.9-billion general reserve and $5.5 billion in new spending proposals.

Since taking office, Davis had worked to gradually restore the reserve after it was eaten up to fund government programs during the recession of the mid-1990s.

With exceptions for education and public safety, those new programs are now taking a major hit. Though the reserve has been cut to a little over $1 billion, some Democratic lawmakers believe it can be reduced further. Others want to go in the opposite direction.

“It would have been preferable for the governor to take a more aggressive stance in cutting this year’s budget. We have to build an extraordinary reserve,” said Peace, an early proponent of bolstering the reserve in response to the energy crisis.

But given the nature of special interest politics in Sacramento, Peace doubts that Davis and the lawmakers will want to make those kinds of cuts.

Though the size of the reserve is certain to cause conflict among members of both parties, there are some who say that Davis may be striking a proper middle ground.

Jean Ross of the California Budget Project, an independent think tank geared toward the concerns of low- and moderate-income Californians, said the governor appeared to recognize that a slump is not the best time to slash the government’s safety net.

“It’s a tough call, because there is clearly a lot of uncertainty out there, but it’s a balancing act,” Ross said. “You don’t want to cut into core services when the economy goes down, because that is when a lot of people turn to the state. But there are also a lot of uncertainties about energy costs.”