Davis Budget Balanced on Hope

Gov. Gray Davis, confronted with a $12.5-billion deficit and a tough reelection campaign, has produced a budget balanced largely on begging, borrowing and hope.

The spending plan that Davis proposed Thursday trims $5.2 billion from a variety of programs without imposing politically unpopular tax hikes or cutting education and public safety, his avowed top priorities.

But he’s also used a variety of accounting maneuvers and questionable assumptions.

Among other things, Davis is turning to the Bush administration and Congress, asking that Washington provide California with more than $1 billion in aid--an iffy proposition. Davis also is proposing to borrow an additional $5 billion. Finally, he hopes that California’s economy rebounds by midyear. When more people are working and paying taxes, state coffers will once again fill.

He also hopes that his administration and Treasurer Phil Angelides will be able to reach an agreement with the California Public Utilities Commission to sell bonds to repay state coffers for the $6 billion it spent last year buying electricity on behalf of the state’s ailing utilities. If those bonds are not sold by the end of June--and Angelides and other experts say time is running short--the state could have an additional $6-billion hole in its budget.

Budget analysts were skeptical of Davis’ budget strategy and assumptions about the economy, as were Republican and Democratic legislators.

“It is a very risky proposal that he’s put forward,” said state Sen. Chuck Poochigian (R-Fresno). “It is based on a gamble. It’s based on a bet that things will get better.”

Lawmakers are sure to change the spending plan between now and the July 1 deadline for having a budget in place. But if the Legislature were to approve the plan for the 2002-2003 fiscal year as Davis proposes, California, which only two years ago had historic surpluses, will be operating at a deficit.

Davis assumes that general taxes--mainly those levied on personal income, sales, and bank and corporate profits--will generate $74.4 billion in the new fiscal year. However, Davis pegs general fund spending, which represents most state programs, at $78.8 billion.

“Clearly, if you look at the budget and ongoing revenue and expenditures, you do have an imbalance,” said Brad Williams, economist for the nonpartisan legislative analyst’s office. “That raises a risk about the out-years.”

Davis has long proclaimed that he is tight with taxpayers’ dollars, and he repeatedly has said he used the windfall of tax money that flowed into Sacramento during his first years in office to pay for one-time costs, like constructing buildings and freeway overpasses.

In a report issued last month, however, the legislative analyst said much of that money also was spent to expand state programs, costing taxpayers more each year. The state general fund has jumped to $79 billion, from $39 billion at the end of the recession in the 1993-1994 fiscal year. About half that increase occurred during Davis’ first two years, the legislative analyst found.

Without structural changes in state spending, the shortfall will remain a problem for at least the next five years. If Davis wins reelection, he will be confronted with a $7.5-billion deficit for fiscal year 2003-2004, the legislative analyst found.

“The fact that the state’s projected annual operating deficit does not disappear over time indicates that the state cannot simply grow itself out of its budget problem,” the legislative analyst’s report said.

As he unveiled his proposal Thursday, Davis called it a responsible budget that protects most state programs. But to do so, Davis is taking a page from his Republican predecessor, Gov. Pete Wilson, who struggled with a $14-billion deficit in 1991.

Like Wilson, Davis is turning to the federal government, asking that it pay California $1 billion for what he contends should be federal responsibilities, including additional terrorist-related security and incarcerating illegal immigrants in California prisons.

Wilson found that federal payments generally fell significantly short of his requests. Asked about a possible fallback plan should the federal government not come through, Davis said, “75% of what I’m proposing I feel confident will be forthcoming.”

In addition to asking for federal aid, Davis is following a pattern that became apparent during his handling of the energy crisis, when he sought to ensure an adequate supply of electricity in part by signing long-term contracts with independent power producers. Those contracts require that consumers pay more than $40 billion spread over the next decade.

Now, Davis proposes that the state borrow to pay for part of this year’s $100-billion budget over time, with much of the bill coming due years after Davis has left office.

Since the start of Davis’ tenure, California has received $500 million a year as a result of the settlement of the nationwide tobacco litigation. The state has used the bulk of the money to pay health care for children of low-income parents and to boost state aid to the aged and disabled. Lesser sums have been used to pay for breast and prostate cancer treatment, and to combat smoking among children.

Following the lead of other states, Davis wants to borrow against the $500-million payments that are supposed to go on in perpetuity to secure $2.4 billion to help solve this year’s budget hole.

To repay bond investors, Davis and future governors will be expected to make annual payments of $190 million for the next 22 years--essentially lowering the tobacco settlement payments by 40% each year, at a cost of almost $4.2 billion over the life of the bonds.

“It is certainly convenient for the short term,” said Paul Knepprath of the American Lung Assn. “But in the long term, we’ll lose significant dollars that could be used in health care and tobacco prevention.”