Budget Just Postpones State’s Pain

Gov. Gray Davis on Thursday signed into law a $99-billion budget that came more than two months after the deadline in the state Constitution and largely postpones difficult decisions on taxes and spending until after this November’s election.

The budget bridges a $24-billion shortfall with relatively modest program cuts. It contains no general tax increases and higher public school spending. That combination virtually ensures that whoever wins the election, Davis or his Republican challenger, Bill Simon Jr., will have to offer voters higher taxes and reduced government services next year, experts warned.

“It’s a get-out-alive budget,” Senate President Pro Tem John Burton (D-San Francisco) said. “The problems next year, no matter what happens, will be severe.”

Burton’s judgment was echoed from the other side of the political fence. “There’s no question in my mind that the tough decisions have been put on hold until after Nov. 5,” said Sen. Bruce McPherson (R-Santa Cruz).

The budget depends heavily on loans, transfers between funds and the hope that the federal government will come to Sacramento’s aid. It also assumes more cuts will come soon.

Davis announced relatively small cuts Thursday, saying he had used the governor’s line-item veto authority to pare $235 million from the budget. Most of the money, $177 million, was cut from the $26.6-billion health and welfare budget. Davis is delaying a plan to expand a program that offers health care to low-income parents whose employers don’t provide health insurance.

The state will, however, expand the Healthy Families Program for children of low-income parents, pushing up the number of people enrolled to 624,000.

The budget authorizes Davis to cut another $1 billion during the course of the fiscal year, which ends June 30. The governor’s aides are working on plans for that, but offered few specifics Thursday on what is to come.

“It is not a perfect document,” Davis said at a perfunctory event in a Capitol conference room in which he said he regretted any inconvenience caused by the delay. “But it does take an important step in meeting the state’s fiscal challenges.”

The budget largely protects spending on public schools, health care and the state prison system, and imposes no general tax increases. But by cutting back on some programs and not giving increases to others, the $98.9-billion plan reduces spending from the $101.3 billion of last fiscal year. It also reflects a 21% increase over the budget Davis signed into law three years ago.

Highlights of the budget include:

* The state’s spending on public schools will rise to $30.7 billion from last year’s $29.9 billion. Sacramento will earmark $7,067 per student in kindergarten through 12th grade, compared with $6,610 last year; that’s $1,300 more than the state spent when Davis took office.

* State revenues will go up as a result of $2.4 billion in additional taxes and accelerated tax collections primarily borne by businesses. Assembly Republicans succeeded in blocking, for now, direct tax hikes affecting the general public. Given that Republicans blocked Democrats from doubling the state car tax and raising tobacco taxes to as much as $3 per pack, the governor can claim that taxes are lower now than when he took office.

* As part of the budget shortfall resolution, Davis is banking on the federal government giving the state $1.1 billion to help cover the cost of heightened security, health care for poor people and the costs of incarcerating illegal immigrants. In the past, the federal government has not come through with as much as Sacramento claims to be owed.

State Finance Director Tim Gage said the state will receive anti-terrorism money, but he characterized as a longshot the state’s chance of receiving other blocks of federal money. The budget hole will deepen if that money fails to materialize.

The spending plan probably will present the state with a $20-billion budget deficit and accompanying financial crisis come January, economists said.

“The good news is, it’s a little less than the problem they didn’t deal with this year,” said Ted Gibson, a former state economist who now works as an economic advisor at Metropolitan West Securities in Sacramento. “But the bad news is, they’ve done all the one-time things they could do.”

Because of that, the governor and legislators will have difficulty avoiding substantial tax increases and program cuts next year, Gibson and other experts said.

“I think the other shoe drops next year,” said Jean Ross, executive director of the California Budget Project, a Sacramento watchdog group. “Barring a major turnaround in the economy, which would be out of line with where the forecasters are headed, this state will face very, very difficult policy choices.”

Thursday’s subdued budget ceremony, Davis’ fourth, marked a stark contrast to the fanfare surrounding the first Davis budget in 1999, when the newly elected Democratic governor was the beneficiary of a surplus of more than $10 billion left by his Republican predecessor, Pete Wilson.

Back then, the governor emerged from the Capitol and walked to a stage as music blared and hundreds of state workers, union members and schoolchildren cheered.

Davis called that first spending plan, signed two days before the start of the new fiscal year, historic, and dedicated it to “the children of this state” because of their sense of optimism and belief that all things were possible. He was joined in 1999 by several legislators, happy to share in the tax-funded celebration.

On Thursday, only one lawmaker, termed-out Assemblyman Carl Washington (D-Los Angeles), came to the budget signing.

By signing the thick budget bill, Davis formally ended the long impasse among Democratic and Republican legislators. The length of the standoff surpassed the record of a decade ago, when Wilson was confronted by a $14-billion shortfall caused by the state’s worst recession since the Great Depression.

Republican lawmakers raised the specter of a state bankruptcy, especially if plans go awry to sell $11.9 billion in bonds to pay for electricity purchases made during last year’s energy crisis. If the sale falters, Davis would be forced to convene a special session of the Legislature to raise taxes and cut spending, GOP lawmakers say.

“We’re going to be in the tank at the beginning of next year,” said Sen. Dick Ackerman (R-Irvine), the lead Senate Republican on budget matters. “Basically, we’re borrowed out. All the tricks you can do have been done, and you can’t do them twice. [Davis] needed to take some steps this year, and he didn’t do it.

“To make it go next year, he’ll have to raise taxes. But he doesn’t want to do that prior to the election. On the other hand, he’ll also have to cut spending. But he doesn’t want to do that either prior to the election. He doesn’t want to level with people.”

Even some administration officials say privately that taxes and fees will rise next year, although Davis himself would not address the issue Thursday.

“I have no expectations one way or another about next year’s budget,” Davis said. “It is absolutely foolhardy to talk about next year’s budget until we get through all the spending implications of this year.”

But while Davis may not wish to discuss possibilities for next time, budget experts say the likely sources to tap for new revenue would include several increases offered but not adopted this year: tobacco, car taxes, a new tax on satellite television, changing the property tax structure so that businesses pay a larger share and reinstating higher income tax brackets for upper-income Californians.

“We’re hearing already those issues will be in play,” said Larry McCarthy, president of the California Taxpayers Assn.

In addition to revenue increases, Davis’ aides are working on a list of ways to trim the additional $1 billion that the budget allows the governor to cut.

Gage said $750 million will be cut from government operations between now and June in an “ambitious” plan.

The state hopes to save another $285 million by reducing its work force by 7,000 positions. However, there will be few if any layoffs. Rather, savings will come as the state withholds money earmarked to fill those jobs. Gage acknowledged that there has been debate over the question of whether eliminating vacant positions actually saves the state money.

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Times staff writer Carl Ingram contributed to this story.