Grim Report Sees Huge State Deficit

California faces a staggering $21.1-billion budget shortfall next year, the nonpartisan legislative analyst projected Thursday, raising the specter of reduced government services and higher taxes for the state’s 34 million residents.

The grim report, which launches the debate over the 2003-04 spending plan, sets the stage for a showdown pitting newly reelected Gov. Gray Davis against the Legislature’s weakened Democratic majority and a rebellious Republican minority that is already vowing to vote against any budget that raises taxes.

The size of the projected shortfall exceeds even the most pessimistic predictions of Republicans and independent experts. An already gaping budget hole could grow by several billion dollars if the California economy doesn’t show marked improvement by mid-2003, said Legislative Analyst Elizabeth G. Hill.

“California policymakers are going to face an enormous challenge in putting together a general fund budget for 2003-04,” Hill said. “The current shortfall, in our view, is going to be much more difficult to resolve than last year’s fiscal challenge.”

Davis and the Legislature struggled to fill a $23.6-billion shortfall in the $98.9-billion budget for 2002-03. They ultimately approved the budget after cobbling together cuts, tax increases and onetime loans, transfers and fund shifts.

Republicans and many independent experts accused Davis and the Legislature’s Democrats of fiscal witchcraft, delaying politically risky program cuts and other unpopular decisions until after the Nov. 5 election.

Republican legislators and losing GOP gubernatorial candidate Bill Simon Jr. suggested several billion dollars worth of cuts. But their proposals fell far short of filling the $23.6-billion budget hole without raising taxes.

In the looming debate on the 2003-04 budget, Hill urged the Legislature to “put everything on the table in terms of all programs as well as all revenue sources,” including tax increases. She also called on legislators to address the $6.1-billion shortfall now projected for the 2002-03 budget because of lower tax collections and higher spending than projected.

But Davis and Democratic legislators face a difficult task in trying to craft a budget that will fill a huge shortfall while winning the support of enough Republicans to achieve the required two-thirds support in the Senate and the Assembly.

Republicans succeeded in blocking this year’s budget for more than two months. The spending plan won the required two-thirds support in the Legislature only after Democrats abandoned proposed general tax increases and agreed to cut spending further. Davis signed the 2002-03 budget on Sept. 5, a record 67 days late.

In this year’s budget battle, Davis largely ignored Republican legislators. But last week, the day after his shaky 5 percentage point win over Simon, the governor spoke of his desire for greater bipartisanship in his second term.

Davis’ Invitation

Davis on Thursday invited Senate and Assembly leaders from both parties to sit down with him in a “Big 5” meeting next week to discuss the 2003-04 budget, said Davis Press Secretary Steven Maviglio.

Davis, who will begin his second term Jan. 6, is required to propose a balanced budget to the Legislature by Jan. 10.

He and legislators of both parties face difficult choices.

Republicans and some like-minded experts say the state should avoid tax increases at all costs. They contend that the state could save billions of dollars by attacking fraud and inefficiency in various departments and programs.

But many experts say those projections are unproven and overly optimistic. Those experts -- and most Democrats -- say the solution has to be a mix of cuts and tax increases.

Legislative leaders on both sides of the aisle sounded anything but conciliatory in comments Thursday.

“I don’t see any Republican votes for [higher taxes],” said Senate Republican Leader Jim Brulte of Rancho Cucamonga. “I don’t feel we should punish California taxpayers simply because Gov. Davis and big-spending liberals in Sacramento have ignored what I’ve been saying for three years, which was the state was overspending.”

Burton Combative

Brulte called on Davis to immediately convene a special session of the Legislature to conduct a thorough examination of government spending and possible cuts.

But powerful Senate President Pro Tem John L. Burton (D-San Francisco), a frequent Davis critic, criticized Republicans for drawing a line in the sand on new taxes and insisting that the budget should be balanced solely through cuts.

“They have this program of read my lips, ‘No new taxes.’ Let them put it out there and see how the people like it,” Burton said.

Burton said he would oppose any reductions in aid programs for the elderly, blind and disabled.

“The budget is not going to be balanced solely on the backs of the sick and the poor,” he said.

With a few legislative races still undecided, Republicans have gained two Assembly seats and appear to have gained one in the Senate. Democrats dominate both houses -- 26-14 in the current Senate and 50-30 in the Assembly -- but the budget requires two-thirds approval, which amounts to 27 votes in the Senate and 54 in the Assembly.

The sheer size of the looming shortfall “makes it imperative that a substantive revenue increase be part of the solution,” said Jean Ross, executive director of the California Budget Project, an independent research group that advocates for poorer Californians. “You can’t bridge a gap of that magnitude solely on the spending side of the budget.”

She pointedly challenged Republicans to offer the specifics of how they propose to fill a massive budget shortfall without raising taxes.

But Larry McCarthy, president of the conservative California Taxpayers Assn., said the problem was too much state spending.

“There has to be adjustments in state spending,” he said. “It’s unfortunate that one of the first efforts is to look at revenue.”

The analyst’s office blamed the looming shortfall in large part on the gap between state spending and revenue collections caused by the stock market decline and the corresponding reduction in state tax receipts. The office now projects that general fund revenue collections in 2002-03 will fall $4.1 billion short of projections and $6.5 billion short of projections in 2003-04 -- largely because of projected declines in personal income tax receipts, Hill said.

“The fiscal condition facing the state of California has deteriorated substantially, particularly because of the performance of California’s economy,” Hill said.

Hours after the legislative analyst’s projection, Davis issued a press release announcing that he was eliminating 6,100 state jobs retroactive to July 1, saving $300 million and fulfilling his 2002-03 budget commitment to eliminate 6,000 vacant positions, a key Republican demand. Davis pledged “more cuts in both programs and positions in the future.”

Hill’s projections are based on the assumption that the California economy will continue “muddling along” through the first half of 2003 before showing modest improvement in the second half, she said.

Future Shortfall

In a sobering look beyond the immediate crisis, the analyst also projected operating shortfalls of between $12 billion and $16 billion until 2007-08.

“What that means is the state cannot grow out of this predicament,” said Hill. “Instead the Legislature and the governor will have to take actions in order to get those expenditure and revenue lines into balance.”