Davis Unveils Budget Plan Based on Cuts, Optimism

Gov. Gray Davis proposed a $100-billion state budget Thursday that would borrow billions of dollars against the future and cut services to the state’s poor in order to close a projected $12-billion shortfall without raising taxes.

The plan also depends on the economy rebounding by midyear, pushing up tax receipts. Some key assumptions, including predictions of revenue from stock options and capital gains, are billions of dollars higher than estimates from the state’s legislative analyst.

The budget, which will be modified between now and May and must be approved by the Legislature, outlined a combination of cuts, accounting changes and spending deferrals to get the state through the next 18 months. Education, which Davis says is his highest priority, was largely spared in the budget-cutting exercises, as was public safety.

Instead, Davis has proposed dashing a state-funded cost-of-living increase for welfare recipients. The CalWORKS welfare-to-work program is set to take $566 million in cuts under the governor’s plan.

Advocates for the poor are also worried that a Davis proposal to revamp child-care services to aid more families could put some former welfare recipients back on the public dole.

The governor portrayed his budget as a “responsible” and “balanced” document that maintains vital services.

“Preparing this budget has been a very painful exercise,” said Davis, who is serving the final year of his first term and is seeking reelection. “Difficult decisions were required, and I made difficult decisions.”

Still, some of the obstacles that he confronts were evident in Thursday’s reactions from leaders of both parties. State Senate Republican minority leader Jim Brulte of Rancho Cucamonga accused the Democratic governor of deficit spending, while Senate President Pro Tem John Burton (D-San Francisco) called the plan “immoral” for its treatment of the poor.

Although it does not raise taxes, the governor’s budget proposal for fiscal 2002-03, which begins July 1, does impose $143 million in new fees and surcharges on a host of less-than-sympathetic characters, including polluters, drunk drivers and other criminals.

The Davis budget also creates a $1 co-payment on prescription drugs under Medi-Cal, which would bring in $30.6 million. A proposal to increase a fee aimed primarily at public and teaching hospitals that serve a disproportionate number of poor patients would raise a little more than $55 million.

Burton, a liberal who is Davis’ most outspoken Democratic critic in the Legislature, denounced the governor’s proposal. He said the plan to eliminate the state’s contribution to cost-of-living increases for the blind, elderly and disabled and CalWORKS welfare participants is an “immoral act that I’m not going to participate in. We’re going to restore cost-of-living increases to those people.

“A cost-of-living increase for some people can be the difference between tuna fish and cat food for their lunches,” Burton told reporters, adding, “I would challenge the governor to live on $400 a month.”

Counting on $1 Billion From Washington

To close a gap estimated at $12 billion or more, Davis has proposed $5.2 billion in cuts. He also wants to put off some expenses and borrow against the future, a strategy that he acknowledges will reduce the amount of money available later. In addition, he is counting on about $1 billion from the federal government, which he has yet to secure, to help cover rising medical and security costs, among other expenses.

Proposals to defer state contributions to the California Public Employees’ Retirement System and the California State Teachers’ Retirement System would free up close to $880 million. But the money must be repaid with interest, and the state must also agree to other financial enhancements for fund members.

A plan to borrow against the state’s tobacco settlement money would raise more than $2 billion, but would require the state to make interest payments and would reduce the amount available from the settlement in future years. The plan would allow the state to immediately receive 40% of settlement money that is scheduled to come in over 23 years.

Brulte accused Davis of engaging in “deficit financing,” which is prohibited in California.

“When you borrow from the Public Employees Retirement System and pay it off over 30 years, when you borrow from the tobacco settlement fund and pay it off over 22 years, when you borrow to pay for current-year expenditures, that is deficit financing,” Brulte said.

“A child who is born today, who enters the work force 20 years from now, will still be paying off Gov. Davis’ 2002-03 budget,” Brulte said.

Jean Ross of the California Budget Project, a group that advocates for the poor during the budget process, said Davis’ plan fails to address the larger long-term problem facing the state’s finances, which has been cited by Legislative Analyst Elizabeth Hill: The current level of services exceeds the amount of money the state is taking in.

“We would like to see some higher taxes, because there is an imbalance between the revenue base and the services the government provides,” Ross said.

The Davis budget proposes to add 100,000 children to the state’s child care programs, but with only a slight increase in spending.

Bruce Fuller, a professor of education and public policy at UC Berkeley, commended the governor for maintaining existing spending levels on child care, but questioned his proposal to expand the number of children who would benefit, saying it would cheapen the quality of care.

“It looks like they are just trying to stretch the existing budget to 100,000 new kids,” Fuller said.

“I see it as the McDonaldization of child care: The patties get thinner and thinner, but it’s the same amount of beef.”

He took issue with a proposal to roll back the maximum age of an after-school child care program from 13 to 12.

The spending plan, which includes a $500-million reserve, presented new challenges for Davis, who enjoyed surpluses topping $10 billion during his first two years in office.

The surpluses coincided with the rise of the Silicon Valley tech set, whose earnings poured billions of dollars into state coffers. The dot-com bust, coupled with a softening stock market, meant many tax revenues slowed dramatically.

One indication that Davis is counting on an economic rebound is the amount of money he is expecting from taxes on capital gains and stock options. His budget counts on $3 billion more from those sources than forecast by the legislative analyst.

And though Davis did not propose raising taxes, his budget relies on revenue from a quarter-cent increase in the sales tax that kicked in this month and is expected to raise about $1.2 billion in 2002.

Deficit Spending Accusation Denied

State Finance Director Timothy Gage denied that the governor’s budget proposal would cause the state to engage in deficit spending. He also said borrowing against tobacco settlement money makes sense when the alternative is making even deeper cuts and an economic rebound is on the horizon.

Spending on education continues to be a priority. The budget proposal earmarks $53.9 billion for kindergarten through 12th grade, $200 million more than approved this year, not counting $1.2 billion in education cuts Davis proposed in November. Per-student spending is set to rise to $7,058 from $7,002, with the same caveat.

One of Davis’ most ambitious plans is to increase funding for before- and after-school programs by $75 million in 2002-03--a move that would pave the way for 79,000 more children to participate.

California’s universities and community colleges also escaped overall funding reductions.

And Davis appears to largely spare local governments, which suffered during the deficits of the early 1990s.

Los Angeles County Chief Administrative Officer David Janssen said his staff was still analyzing the budget to see how much it would cost the county, but said, “We think this is a good start.”

AIDS activists praised Davis for allotting more money for a drug assistance program and maintaining funding for related programs.

Beth Capell, spokeswoman for Health Access California, lauded Davis’ budget plan for minimizing damage to health care. He has not proposed shrinking the number of people eligible for Medi-Cal or reducing their level of benefits, as other strapped states have. Capell said her group would lobby against proposed cuts to county hospitals, delays on parent coverage and requirements for Medi-Cal co-payments.

Davis also agreed Thursday to provide hospitals with hundreds of millions of dollars promised to them as part of a 1999 legal settlement with the state.

“The mere fact that no one is rescinding those agreements in light of a $12-billion budget deficit, we feel is a very positive step,” said Jan Emerson, spokeswoman for the California Healthcare Assn.

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Times staff writers Carl Ingram, Charles Ornstein, Robin Fields and Nicholas Riccardi contributed to this report.