Crunch Time for Governor

For all the number-crunching that went into the state’s new projected budget shortfall, the figure Gov. Gray Davis announced Wednesday is a political calculation as well.

The governor has to lead the state out of its budget crisis, and he needs the Legislature’s help to do it.

Rather than downplaying the vastness of the budget gap, Davis announced three weeks before he was required to do so that he now expects the hole to be $34.8 billion.

And after a first term marked by cool relations with the Legislature, the governor appointed a legislative insider, former Senate Budget Committee Chairman Steve Peace, as his new finance director and chief budget liaison with lawmakers.

Both moves are part of a broader political strategy for a governor who won reelection last month by a surprisingly narrow margin against a political novice, Republican Bill Simon Jr., who throughout the campaign accused Davis of failing to confront problems directly.

“They’re staring [the problem] in the face,” said Lenny Goldberg, who lobbies on budget and tax matters for an array of clients, including organized labor. “There’s no more papering it over. The time is here to truly confront it.”

Davis was under no obligation to release the deficit estimate Wednesday. He could have waited until Jan. 10, when he unveils his proposed spending plan for the fiscal year that begins July 1. But he did so to dramatize a problem -- and his role in addressing it -- that could dominate his second term. He already has proposed $10.2 billion in budget cuts and has called a special session of the Legislature to deal with the state’s finances.

On Wednesday, Davis acknowledged in his most direct language so far that tax hikes will be part of the budget he offers Jan. 10. That proposal, he said, “will have further reductions and, in all likelihood, it will have some revenue increases.”

Democratic lawmakers and many lobbyists already have proposed a variety of tax proposals, ranging from new fees on alcohol to taxes on services such as lobbying, and higher state income taxes.

Even as Davis announced that the deficit had grown to $34.8 billion, some skeptics were suggesting that he had inflated the size of the problem, in part to soften opposition to tax hikes that almost certainly are coming.

“Some of what they’re trying to do is build a case for tax increases,” said Assemblyman Ray Haynes (R-Murrieta), who said he believes the true deficit is more like $25 billion.

Davis’ defenders dispute that contention, saying he is confronting the budget hole as quickly as possible so he won’t face a continuing crisis for the rest of his tenure as governor.

“He doesn’t want to live with this for the next four years,” said Susan Kennedy, Davis’ Cabinet secretary and one of his top aides on budget matters. “If he has to walk through fire, he wants to do it once.”

While the budget situation grew bleaker, legislators welcomed Davis’ decision to hire Peace as his finance director.

Peace replaces Timothy Gage, who joined the administration in 1999 after being one of the Legislature’s top budget analysts.

Peace brings knowledge of budget matters and an ability to communicate with legislators. He’s also opinionated. Though he’s been relatively close to Davis, he is likely to challenge the governor and argue for his position.

Democratic lawmakers have been among the harshest critics of Davis, often chastising him for failing to exert leadership on an array of matters, including the budget and the energy crisis in 2001.

Sen. Don Perata (D-Alameda), for one, surveyed the $10.2 billion in cuts that Davis rather hastily proposed earlier this year, and concluded that the governor was asking legislators “to do the heavy lifting.”

On Wednesday, Perata said that by selecting Peace, Davis was “extending an olive branch” to the Legislature.

Peace will be especially valuable if, as expected, Cabinet Secretary Kennedy leaves the administration. Kennedy has good relations with several lawmakers, among them Senate President Pro Tem John Burton (D-San Francisco), who has often clashed with Davis but was pleased by the choice of Peace.

“Everybody knows him, everybody likes him, everybody respects him,” Burton said.

Republican Haynes, among the most conservative legislators, criticized Peace.

“He was chairman of the Budget Committee when we went from a $12-billion surplus to a $24-billion deficit,” he said.

But Haynes extolled Peace for his intelligence and called him a friend.

“He is one of the most knowledgeable people about the budget. There’s no question about that.”