Davis Unveils Plan to Tackle Budget Deficit

Gov. Gray Davis unveiled a plan Wednesday to knock nearly $3 billion off an anticipated $12.4-billion deficit by cutting spending, delaying programs and raiding other government funds, with education set to take the biggest hit.

In his most decisive response yet to the state’s growing fiscal woes, Davis said he will also call the Legislature to meet in a special session to tackle the budget when it convenes in January.

Until then, lawmakers are expected to mull over a list of $2.24 billion in spending cuts and funding shifts that Davis released Wednesday during a meeting of Democratic and Republican legislative leaders.

The proposals--touching on topics ranging from transportation and trauma care to child welfare services and foster care--are intended to take effect in the current fiscal year, which ends June 30. But a number of cuts would carry over to save the state another $758 million in the 2002-03 budget year, for a total of nearly $3 billion.

Davis ordered state agencies Wednesday to freeze spending in more than 80 programs to save money until the Legislature has time to act on his plan.

Some of the reductions would be felt directly in Southern California. A plan to shift construction costs for the Los Angeles Crime Laboratory to state-financed lease revenue bonds is expected to save the general fund $82 million, while eliminating funding for a Los Angeles River parkway project would save $5 million.

Others could affect the poor, such as a proposal to return to the general fund $53.7 million earmarked for a program to assist low-income Californians with their energy bills.

But the bulk of the proposals target the governor’s pet cause: education. Davis’ plan would cut school funding by $1.2 billion, of which $842 million would be carved out of the current fiscal year and the rest from the following one.

Davis is proposing to take back $250 million earmarked for schools to cover energy costs, to slash by half his staff performance awards at a savings of $50 million, and to delay a much-heralded $200-million program to rescue the state’s lowest-performing schools until July 1. The latter move is expected to save from $30 million to $50 million.

Also targeted is $40 million earmarked to make funding for urban and rural schools more equal; Republicans pushed for that as part of last summer’s budget deal. Another candidate for the chopping block: a $29.7-million expansion of before- and after-school programs for students.

School officials, who were briefed by the Davis administration prior to Wednesday’s announcement, took the proposed cuts in stride.

One reason could be that the state has over-funded the minimum guarantee for education for the past five years, including by $4 billion in the current budget. Consequently, even with the cuts, spending on schools in 2001-02 would be greater than in the previous year, according to administration officials.

“I think we’ve done about as well in a bad situation as we can do,” said Wayne Johnson, president of the California Teachers Assn. “They’re really not cutting the meat here.”

Added Kevin Gordon, executive director of the California Assn. of School Business Officials: “We’re obviously disappointed . . . [but] these cuts now will prevent us from having what would otherwise have been double the cuts in the upcoming budget year.”

Delay for Healthy Families Expansion

Not everyone is as understanding. Davis proposed to delay by nearly two years an expansion of the Healthy Families program, which provides health insurance to poor children, to cover certain parents. News of the proposed delay to July 2003, which is projected to save $54.3 million in the current fiscal year and $160.5 million the following one, was met with dismay.

“It makes no sense at all because California has an excess of federal funds for Healthy Families that we can match 2-1 to add parents to the program,” said Jim Keddy, executive director of the PICO California Project, a faith-based group that advocates for the poor. “For a fairly small investment by the state we get a big investment for families in California.”

Davis’ proposals fall on lawmakers’ pet projects in two areas. They include returning to the general fund $42 million allocated in the 1999 and 2000 budget years for local park projects and reclaiming $30 million set aside in the last legislative session for projects requested by individual lawmakers.

GOP lawmakers lauded the announcement by Davis as a “good start,” but said more cuts are needed.

“Clearly it should be on the north side of $2 billion and go from there,” said Senate Republican Leader Jim Brulte of Rancho Cucamonga.

“No responsible leader could contest the need to make these cuts,” added Senate Budget Committee Chairman Steve Peace, an El Cajon Democrat.

Senate Leader John Burton (D-San Francisco) predicted that Davis will have to sell members of his caucus on cuts and delays dealing with the low-performing schools, Healthy Families and the program that assists the poor with energy costs. Burton also suggested it may be time for the state to restore part of the reduction in vehicle license fees in a bid to raise revenues.

“There’s no way in the world that sufficient cuts can be made to cover the deficit,” Burton said.

Many of the proposals floated by Davis will require legislative approval because they seek to shift or un-appropriate funds.

Davis said he will call a special session for that purpose, but it will convene in January, concurrent with the Legislature’s next regular session. In a special session, lawmakers can pass certain legislation that normally requires a two-thirds vote with simple majority support.

Also, approved legislation takes effect 90 days after a special session ends, unlike most bills, which do not become law until the following year. And lawmakers can still pass urgency measures that take effect immediately with a two-thirds vote.

Driving the cuts are softening revenues caused largely by the stock market’s decline. State Legislative Analyst Elizabeth Hill said Wednesday that California is now on pace to end the current fiscal year with a $4.5-billion deficit that is expected to grow to $12.4 billion the following year, or roughly 15% of the general fund.

General fund revenues, which grew 22% in the 1999-00 budget year and 8% in 2000-01, are projected to fall by 12% in the current fiscal year.

Hill described the drop as “the single largest year decline in state revenues in the post-World War II period.”

“That’s what’s really throwing this budget out of balance,” Hill said.

Falling Revenue Due to Stock Market Decline

To illustrate the magnitude of the shortfall, Hill said that the University of California and California State University systems’ budgets by themselves are estimated to total $6 billion.

Revenue is on track to dip $9.4 billion in the current fiscal year to $68.3 billion, a sum that is more than $10 billion below an estimated $78.7 billion in expenditures.

A major force behind the falling revenue is a nose dive in receipts generated via personal income taxes on capital gains and stock options, according to Hill, who released a report Wednesday outlining California’s economic outlook through 2007.

Income from the two sources soared from $25 billion in 1994 to $200 billion in 2000. The latter sum funneled $17 billion in tax revenue to the general fund and accounted for 22% of the fund. By comparison, revenue from capital gains and stock options is projected to drop to $7 billion in the current fiscal year.

Helping to fuel the drop is a decline in stock prices of California high-tech companies, with prices for companies such as Cisco Systems, Hewlett-Packard Co. and Sun Microsystems down last month by 75% or more from their early 2000 peaks. Investors and employees also sold an unusually large number of stocks in 2000.

Hill said she expects the economy to rebound by next spring, but warned that a six-month delay could reduce revenue by as much as another $4 billion. Among the factors that could cause a delay, she said: continued fallout from the Sept. 11 attacks, a further decline in stock market-related earnings and the timing of an uptick in U.S. investment spending, particularly as it pertains to high-tech goods and services.

Even after a recovery, however, the state is still facing the prospect of annual deficits, including a $4.1-billion hole in 2006-07, barring substantial cuts in ongoing expenses.

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Times staff writers Miguel Bustillo and Nancy Vogel contributed to this report.