Balancing Budget Is Risky Job for Davis

Facing the threat of a $12-billion deficit at the same time he tries to orchestrate his reelection, Gov. Gray Davis unveils a state budget this week that will be as much about politics as spending.

Contained within the pages of the purple, telephone book-sized document are the governor’s policies, ranging from how much money the state should spend on each public school student to whether it can keep paying for breast cancer treatment and helping the poor with their energy bills.

With elections approaching and the state running short of cash, Davis faces the tough task of staking out his policies without giving political opponents fresh fodder or alienating fellow party members and constituents.

From the right, three GOP gubernatorial opponents are hammering Davis’ handling of California’s finances. Along with Republican lawmakers, they have found fault with the Democratic governor’s response to the energy crisis and the growth of state government under his tenure.

Davis faces another set of hurdles from the left. He must figure out a way to appease fellow Democrats who rule California’s Legislature and still persuade them to approve spending cuts of nearly $3 billion, maybe more.

It will be a tough sell given that Senate Leader John Burton (D-San Francisco) believes that raising taxes is a better way to attack the deficit than cutting services for the poor. He stepped up the pressure last week by proposing a $2.5-billion annual income tax increase for the wealthiest Californians.

“Politics is a matter of luck and timing, and for Davis, the timing couldn’t be worse,” said Sherry Bebitch Jeffe, who teaches political science at USC. “Voters are not happy about having programs cut or taxes raised. It’s a rule of thumb.”

The Davis administration had made clear that it planned to balance the budget primarily by cutting spending, refinancing debt and borrowing--as opposed to raising taxes. In fact, Davis made it clear at a press conference Saturday that he has no intention of calling for any increase in taxes.

Lawmakers will join the process with their own ideas.

But for now, anticipation is building for Thursday’s presentation of Davis’ 2002-03 budget proposal. Although the administration closely guards the details, clues have emerged about how the governor may seek to close the $12-billion deficit and about an array of other fiscal tools at his disposal.

* Cuts and delays:

The largest chunk of savings Davis has acknowledged he is counting on comes from the roughly $3 billion in cuts and spending deferrals he proposed in November. The bulk of the reductions would fall on one-time expenditures, and more than a third would hit the governor’s pet cause: education.

Proposals to delay a $200-million plan to assist struggling students and another expanding a health insurance program for poor children have received a particularly chilly reception from Democratic lawmakers, whose approval Davis needs to carry out the trims.

* Freeing up cash:

Getting creative with its cash flow is another tactic the state can employ to deal with a deficit. By restructuring its contributions to the California Public Employees’ Retirement System, for example, the state could free up about $1 billion during the 2002-03 fiscal year. Under a plan approved by the CalPERS board, the state would agree to repay the money over the next 30 years and bolster inflation protection for current and future retirees beginning in 2005.

The state could knock another $1 billion off the deficit by taking advantage of low interest rates to refinance its general obligation bonds, as Treasurer Phil Angelides proposed last week. Davis’ finance officials say they are examining ways to reorganize state debt.

Restructuring either the bonds or the CalPERS contributions would leave the state with more cash to deal with the deficit, but would put pressure on its coffers in future years. The state could save another $2 billion, according to one estimate, by borrowing against its annual share of tobacco settlement money over the next five years.

Advocates for the poor, meanwhile, fear that the governor will propose freezing cost-of-living adjustments for health and welfare programs--a move that could save the state hundreds of millions of dollars. Local governments are equally concerned that state officials will skimp on reimbursements owed to cities and counties.

* Federal aid:

Davis may count on money he expects California to receive from the federal government to help close the deficit. The National Governors Assn. has asked Congress to give states at least $3 billion to respond to bioterrorism threats and to cover security costs. The association is also urging the federal government to increase its share of Medicaid costs to help states deal with budget shortfalls. Davis could ask for more federal help to pay the incarceration costs of illegal immigrants in California prisons.

* Reform:

The Davis administration has considered overhauling a variety of programs to save money. They include job training, juvenile justice and substance abuse programs.

Administration officials have indicated that the governor will introduce a plan to revamp child care programs. The aim is to keep rising costs in check and to aid more struggling families.

Rumors abound that additional reforms could focus on bolstering teacher training and improving fiscal accountability at schools by holding chief financial officers to higher certification standards.

* Raising revenue:

Finally, though Davis has said he believes he can present a balanced budget that does not include tax increases, health and safety advocates may ask voters in November to approve a quarter-cent sales tax increase to raise about $1 billion annually for anti-terrorism expenses.

A tax increase would reduce pressure on Davis to pull together additional funds for that purpose.

Democratic lawmakers are also seeking to roll back or suspend a popular tax cut enjoyed by motorists. The proposal, which would save the state about $4 billion a year, has put members of the business community, who by their own estimate pay for about a third of the vehicle license fees, on edge.

“We are afraid there will be a big push for a tax increase to solve a problem,” said Fred Main, senior vice president and general counsel for the California Chamber of Commerce. “The business community is generally the first group to be looked at.”

Tax Increase OK if Services Preserved

Others, however, are amenable to a tax increase if it means that services can be preserved or expanded as previously planned.

“When you look at trade-offs between making progress for families and some fairly minor fee increases, people are open to the increases,” said Jim Keddy, executive director of the PICO California Project, a faith-based group that advocates for the poor.

Another revenue-enhancement option: Begin charging or increasing a variety of fees, including one aimed at primarily public and teaching hospitals that serve a disproportionate number of poor patients.

The conflicting pressures facing Davis guarantee to cast a spotlight on the state budget-making process, an arcane and traditionally low-key exercise. Analysts predict a rocky road ahead for the governor.

“I think he’s going to have a tough time because of the political constraints during an election year,” said Jean Ross, executive director of the California Budget Project, a nonprofit research and advocacy group. “My fear is that people will be looking to leverage partisan interests over a cooperative solution for the budget.”

Lawmakers will dissect Davis’ spending proposal in coming months, using it as the starting point for their own budget plans. Meanwhile, Davis will get a better sense of how the state’s finances are shaping up after personal income tax receipts come due in April.

Armed with the fresh financial data, he’ll present a revised budget in May. That in turn will become fodder for the budget conference committee the Legislature typically convenes each spring. The committee puts out a compromise budget that is debated in each house of the Legislature and usually results in negotiations between legislative leaders from both parties and the governor’s administration.

The Legislature’s frequently missed deadline for approving the budget is June 15, and Davis faces a July 1 deadline for signing the document.

For their part, Davis administration officials are counting on cooperation from lawmakers to help balance the budget.

“No single person can close a $12-billion budget gap by themselves,” said Susan Kennedy, Davis’ deputy chief of staff and secretary of his Cabinet. “We all have to work together to address a problem of that size.”

Perhaps, but arguably no politician has as much at stake as the governor.

To Get Reelected, Davis Mindful of Constituents

Davis has to worry about getting reelected this year, which means he must maintain a high profile as California’s top leader and problem solver. Perhaps that is why, even as the state is experiencing softening revenues, he has continued to scrape together money for various constituents and causes.

Just last month, he announced a $1-million tax break for the agricultural community, plans to provide $5 million to county health departments to fight bioterrorism and nearly $19 million in federal funds to extend child care benefits for certain former welfare recipients. He also scrapped an unpopular proposal last week to dash $25 million in funding for trauma care centers.

At the same time, lawmakers will be pushing their own agendas.

“It’s going to be difficult,” said state Sen. Steve Peace, the El Cajon Democrat who heads the Senate Budget Committee. “The biggest part of the difficulty is going to be dealing with term-limited legislators in an election year.”