Larger Budget Shortfall Predicted

Lawmakers will need to come up with an additional $5 billion to balance the state budget as the recession and weakening stock market take a heavier toll on California coffers than previously anticipated, Legislative Analyst Elizabeth Hill warned Wednesday.

Hill predicted that Gov. Gray Davis’ $97.9-billion spending plan for the next fiscal year--which contains a road map for closing a $12.5-billion shortfall--would still leave the state’s bank account $5 billion out of whack.

So far, Davis and lawmakers have solved nearly $3 billion of the now-$17.5-billion problem by adopting a variety of cuts and budget adjustments in the current fiscal year, some of which will carry over into 2002-03.

In her annual critique of the governor’s budget proposal, Hill blamed the growing gap on a combination of overstated revenues to the tune of $3.9 billion and understated expenses of $1.1 billion.

Hill has the advantage of analyzing December and January tax receipts, unlike the Davis administration, which fashioned its 2002-03 spending plan late last year.

Consequently, Hill is predicting a steeper decline in the amount of capital gains and stock-option income reported on returns. Her office projects a 62% dip, compared with the 47% decline anticipated by the administration.

The state has grown increasingly dependent on such revenues in recent years, but they have dropped off sharply because of the stock market’s downturn.

Hill warned that California’s fiscal woes may worsen if, as she predicts, the federal government does not fully meet Davis’ request for $1.1 billion in assistance.

The news isn’t likely to get better any time soon. California faces the prospect of ongoing operating shortfalls of $7 billion in each of the two fiscal years starting in July 2003, Hill said.

She also took the unusual step of supplying lawmakers with more than 100 options to trim expenses, many of which are difficult to imagine winning approval in an election year.

They range from temporarily suspending dental services for pregnant women to releasing inmates from prison early, raising college tuition fees and reinstating recently reduced fees at state parks.

Options that touch Southern California in particular include dashing subsidies for local film-production permits and eliminating the Office of California-Mexico Affairs, which deals with border-related economic issues.

“There’s a lot of flexibility in terms of balancing,” Hill said. “But what you are doing is reducing services to the people of California.”

Her list of budget-cutting ideas seemed to include something for everyone to hate.

“These are exactly the kind of recommendations we were afraid we’d see if we needed to make cuts of this depth,” said Beth Capell, a spokeswoman for Health Access California, a coalition of more than 200 community, consumer and labor groups. “This illustrates that when you cut $5 billion or more from the budget, real people get hurt in real ways.”

The list included more than a dozen options designed to save the state millions of dollars by relaxing California’s system for punishing criminals.

David LaBahn of the California District Attorneys Assn. predicted that crime and prison rates will rise if lawmakers sign off on all of them.

“You can certainly close the budget gap by not incarcerating people or releasing them early,” he said. “But what does that do for public safety?”

Kevin Gordon, executive director of the California Assn. of School Business Officials, expressed alarm over an option that would save the state $770 million by tapping dollars earmarked for education to pay for certain child-care costs.

Davis indicated in a radio interview Wednesday that he believes that Hill’s figures are overly pessimistic. Final budget decisions ultimately will be based on how much money has landed in state coffers by May, he said.

Finance Director Tim Gage said he does not agree with Hill’s prediction that the state will have to spend $825 million more on education than his office assumes, nor does he agree that the state will face ongoing annual deficits of as much as $7 billion.

State Senate Leader John Burton, the San Francisco Democrat who has called for the restoration of top income-tax brackets, reiterated his belief that a combination of cuts and new revenue should be used to close the gap in light of Hill’s latest analysis.

“It’s getting to almost an insurmountable situation, but we will do our best to persevere,” he said.

Republican lawmakers placed the blame on Davis, whom they accused of “cooking the books.”

“Not only is he playing politics with your money, but he’s playing politics with money you don’t even have,” said Senate Republican Leader Jim Brulte of Rancho Cucamonga.

“The governor tried to shove the problem under the rug,” said Assemblyman John Campbell (R-Irvine), vice chairman of the Assembly Budget Committee. “But I’m not sure the rug is big enough for the size of this problem.”

Hill generally appeared to approve of the governor’s strategy of using a combination of cuts, borrowing and new revenue to whittle the shortfall, but she took aim at a variety of his proposals.

Her office found numerous examples of what it described as highly optimistic assumptions by the Davis administration. Hill noted, for example, that the Davis budget assumes that the federal government will chip in about $55 million a year to fund its portion of the CalFed program, a state-federal partnership that addresses regional water problems.

But the federal government has yet to reimburse the $55 million for the current budget year, making it “highly uncertain” that it will do so during the next budget year, the analysis concluded.

Also, the Davis budget assumes that Proposition 40, a bond measure on next month’s ballot, will pass and that proceeds from the bond could be used to fund CalFed.

Lawmakers will need to consider other options if the bond measure fails or the federal funds fail to materialize, the report said.

Hill raised concerns about the use of the state’s motor vehicle account to finance the California Highway Patrol’s homeland security costs.

She said the account, which is primarily funded by car registration fees and is supposed to finance car regulation and enforcement, “is not an appropriate funding source” for security measures.

She predicted that if the state continues to use its money for security, the fund will be $230 million in the red by the end of the 2003-04 budget year.

Though the budget assumes that onetime federal funding will offset the costs, Hill said that the chances of obtaining that money remain “highly uncertain” and that, according to the CHP, those costs will continue beyond the next budget year, placing pressure on future budgets.

Hill recommended that the Legislature reject both a proposal to begin charging Medi-Cal beneficiaries co-payments and another proposal by Davis to reduce provider rates for services supplied to Medi-Cal recipients out of concern it would reduce patient access.

Hill’s complete analysis is available online, at www.lao.ca.gov.

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Times staff writer Miguel Bustillo contributed to this report.