Davis’ Revised Budget Digs Heavily Into Reserves

Faced with a daunting combination of rising energy costs and a precipitous drop in tax revenue from stock options, Gov. Gray Davis unveiled a pared-down budget Monday that protects public school funding but spends much of the emergency reserve and takes money from road construction.

The revised budget for the 2001-02 fiscal year contemplates cuts and shifts totaling $5.7 billion compared with the budget he proposed in January.

Davis said the reductions are necessary because state revenue is falling $4.2 billion below state Department of Revenue forecasts, while spending to keep up with growth in demand for social services and other programs is increasing by $1.5 billion over prior predictions.

The result is a politically volatile plan that Republicans may contest--particularly in its recommendation to reduce the state’s reserves. In addition, some popular ideas had to give way to make up for the shrinking revenue predictions.

Gone, for instance, is the governor’s $27-million proposal for a back-to-school sales tax holiday, during which the state sales tax was to be suspended during a three-day weekend. Also deleted is $300 million that had been earmarked for local governments.

The budget also assumes that the statewide sales taxes, cut by a quarter of a percent this year, will rise by a like amount on Jan. 1, at a cost to taxpayers of $1.2 billion over a full year.

Davis is proposing to reduce funding for a new program to clean up California beaches from $100 million to $10 million, and shave about $50 million off the Department of Corrections budget due in part to projections that the growth of inmate population is slowing.

The governor also is calling for a 2.5% reduction in funding for most state departments, a move expected to save an additional $50 million.

The biggest money shift comes from transportation. Davis found $2.2 billion to help him through the state’s cash crunch by delaying for two years the transfer of sales tax on gasoline to pay for transportation projects. Those projects, intended to ease urban traffic congestion, still will be paid for, Davis said, because, at the moment, money is coming into the transportation fund faster than the state can spend it.

Nevertheless, Assembly Republicans say they oppose that proposal.

Despite the reductions, the budget remains a record $102.9 billion. That’s down from the $104.7-billion spending plan Davis offered in January, but remains above the $99.4-billion budget he signed into law last year. The general fund, filled primarily by income and sales taxes and used to pay for schools, prisons and most other programs, will be $74 billion, down from $78 billion this year, Davis says.

The governor’s budget revision, filed each year after the April deadline to file income taxes, marks the start of serious budget negotiations between lawmakers and the governor.

Davis said he remains optimistic that the budget can be in place by the July 1 start of the new fiscal year. However, the budget requires a two-thirds vote, and Republicans were skeptical of Davis’ proposal.

Senate Republican Leader Jim Brulte of Rancho Cucamonga noted that Davis will need favorable votes from minority GOP members to get the budget passed by July 1. But he said the governor’s revisions may have put the deadline in jeopardy.

“His rejection of most Republican budget proposals is a disturbing sign,” Brulte said.

The governor blamed much of the decrease in revenues on the slumping stock market.

“The state of California is no longer enjoying the dividends of a surging stock market,” Davis said. “We no longer are seeing tremendous revenues thrown off by capital gains decisions and stock option decisions that so handsomely added to our surplus last year.”

State officials estimate that 42% of the $81-billion increase in wages and salaries last year was the result of stock options being exercised--a trend largely fueled by Silicon Valley’s once-booming high-tech firms, many of which are now in decline.

When the stocks of many technology companies soared during the late 1990s, employees with options and other investors profited and, in turn, their tax payments shot up. But now that stocks have slumped for more than a year, tax revenues from exercised options and other stock market profits have dwindled.

Davis said he expects stock options and capital gains to decline to $138 billion this year, compared with $201 billion last year and $141 billion in 1999.

California’s ongoing energy crisis is also putting increasing pressure on the state budget.

Davis said he had not added up the total amount that the crisis is costing the state due to rising electricity costs. But his new spending blueprint was scattered with evidence of the growing toll that California’s electricity meltdown is taking on the budget, including $39.2 million to cover growing utility costs facing state agencies and $540.8 million to help school districts deal with energy costs.

All of Davis’ calculations are based on the premise that the state will be repaid more than $6 billion for loans made from the general fund this year to cover energy costs. He warned that any problems in the sale of bonds could spell hard times for the state.

Assembly Republican Leader Dave Cox of Fair Oaks placed the blame squarely on Davis.

“If the governor had spent as much time on this energy crisis as he has raising money [for his reelection campaign], we would not be in this situation,” Cox said.

With most lawmakers new to Sacramento, few recall a time when they couldn’t get money for at least some of their pet projects. Spending on so-called members’ requests for everything from new museums to riverside parks had been going up dramatically in recent years.

“It would be hard enough without the energy crisis,” Sen. Martha Escutia (D-Whittier) said, predicting that the budget approval this year won’t come easily. “It’s not going to be Christmas in July. Everything is off the table.”

Sen. Don Perata (D-Alameda) predicted that except for schools, energy conservation and emergency reserves, most programs face the prospect of no increase or small decreases.

Perata also said Davis’ proposal to extend the middle school year, already pared back by Davis and lacking Democratic support, will fail this year. Still, he holds out hope that budget negotiations can end on time, with a budget in place by July 1.

“I would hope that everyone would recognize that our problems will only get worse in a protracted budget fight,” he said.

Senate Leader John Burton (D-San Francisco) said he was surprised that Davis’ cuts did not go deeper. But he also said he will be pushing to increase spending for some programs, such as child care for poor parents.

Assembly Speaker Bob Hertzberg (D-Sherman Oaks) said lawmakers would likely make serious changes to Davis’ plan, possibly looking to cut reserve even further than Davis has proposed.

“The reality is that the governor suggests a budget, and we work with it. The last time I checked the Constitution, the Legislature writes the budget. If he does not like some of what we do, he can blue pencil it out.”

Even as the Democratic governor cut a slew of programs and borrowed from others, he proposed increased funding for education by $677 million over the amount he floated in January, pushing general fund spending on education up $33.2 billion over the previous year. Spending per student, however, dipped slightly to $7,168 under Davis’ new plan, compared with $7,174 in January.

Funding for a major expansion of the Healthy Families program, which provides insurance to low-income Californians, was also largely left intact, with the exception of a reduction to reflect lower enrollment numbers than were anticipated in January.

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Times staff writers Dan Morain, Carl Ingram, Stuart Silverstein and Miguel Bustillo contributed to this story.

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Spending Plan: State would dip into reserves to avoid deep cuts. B8