GOP Budges on State Budget

Signaling a break in California’s gridlocked budget negotiations, Assembly Republicans conceded Tuesday that the state cannot simply cut its way out of its $35-billion financial crisis and that the solution should include borrowing billions of dollars.

The concession was revealed in a Republican plan for closing the budget gap that included steep program cuts, a spending freeze and raising community college fees.

But the linchpin of the GOP proposal is Republicans’ agreement to finance $10 billion of the state’s budget shortfall over the next five years instead of trying to close the entire gap -- estimated to be as large as $35 billion -- by mid-2004.

In a 40-page presentation circulated in the Capitol, Republicans called such borrowing “generally repulsive,” but acknowledged that the shortfall has become so large that it is “preferable to other alternatives which would hurt the economy.”

In return for their flexibility on borrowing, the Republicans make a series of demands on Democrats. Their plan calls for a constitutional spending cap, a ban against future debt financing, and the requirement of a two-thirds majority vote to raise fees that Democrats now can approve by majority vote.

“Our job is to balance this budget next year and every year thereafter,” said Assembly Budget Committee Vice Chairman John Campbell (R-Irvine).

Though the plan includes many items unattractive to Democrats, members of both parties called it a significant breakthrough that could provide the foundation for a compromise budget deal.

“You no longer can say, ‘Where is your plan?’ ” said Assembly Republican leader Dave Cox of Fair Oaks. “We have laid it out for you.”

The movement on the budget represents the first time Assembly Republicans have revealed how they ultimately may be willing to strike a deal. Though Gov. Gray Davis warned that the plan “uses fuzzy math, and it doesn’t add up,” many legislative Democrats welcomed the proposal.

Assemblyman Joe Canciamilla (D-Pittsburg), who has led efforts to craft a bipartisan budget solution in the Assembly, called the Republican plan “a major step toward getting a budget resolution by June 15,” the deadline set in the California Constitution.

Some Democrats say the plan could even suggest that Republicans might be willing to vote for some measure of tax increases, even though they have so far adamantly opposed them.

Democrats are pinning their hopes on the possibility that some tax hike may be necessary to proceed with the GOP’s borrowing plan. Wall Street investment firms have warned that they are unlikely to lend California billions to close the budget gap without a new revenue stream to underwrite the notes.

State Finance Director Steve Peace said, based on what he was told at a meeting Monday with Davis and representatives of every major investment firm in the country, the GOP plan will work only if it includes a new tax.

“The Republican deficit-financing plan will not work without a new revenue source because the market will not support the state’s lending needs without it,” Peace said.

He later added: “We’re kidding ourselves if you think you can do this without a new revenue source.”

Democrats now hope that the banks will persuade Republicans to consent to some sort of new tax -- such as a temporary half-cent sales tax hike that would raise $2 billion a year.

Republicans still say that is wishful thinking.

“We will not compromise on taxes,” said Assemblyman Ray Haynes (R-Murrieta), one of the GOP’s most conservative members.

Even so, the plan -- which came out of a Republican caucus group that Haynes led with Assemblyman Keith Richman of Northridge, who is one of the Republicans most willing to compromise with Democrats on budget matters -- has other elements that Democrats may find attractive.

Richman said it is more “compassionate” than the budget proposed by Davis in January.

The plan would preserve health insurance for nearly 300,000 poor Californians who would lose it under the Davis plan. And the Republican proposal also would preserve dental care for Medi-Cal recipients that Davis has called for eliminating, and would reject a Davis proposal to cut by 15% the reimbursement rate to doctors who provide care to the poor.

The plan makes up for that money with many other program cuts. The University of California and California State University systems would be cut by more than $600 million a year, and community college fees would be increased to $26 per credit, even more than Davis proposed. Peace said the UC cuts would force the closure of an entire campus.

State bureaucracies would be cut by 10% across the board to save $940 million a year. And though Medi-Cal would be preserved, other health-care programs for the poor would be cut by hundreds of millions of dollars.

Funding for human service programs -- assisting the blind, elderly and disabled -- also would be curtailed significantly.

Assembly Republicans also are proposing cuts to the state prison system; that’s something they have been reluctant to do. Though Democrats have called for saving money through the early release of nonviolent offenders, the GOP plan calls for saving $500 million a year by scaling back inmate health-care and prison substance abuse programs.

A significant chunk of the GOP cuts could be offset by a fee that Democrats favor: a tripling of the state vehicle license fee charged to California car owners. Republicans said they did not factor the car tax revenue into their budget plan because they oppose it; they have at times threatened to challenge any increase in court.

But the fee is expected to be increased by administrative order, rising by $136 a year for most drivers and raising about $4 billion a year. Richman and other Republicans have said that even though they despise the car tax hike, it appears that it is on its way to happening. If the fee goes up, it would bring in money that could eliminate the need for some of the proposed cuts, they say.

The Assembly GOP plan follows a similar plan offered in February by Republicans in the Senate. But the Senate plan was far less flexible. It called for the shortfall to be paid off in full within two years, and contained billions of dollars of cuts on top of the reductions Davis had already proposed.

Senate Democrats dismissed the GOP plan as “draconian.”

After the Assembly Republicans unveiled their plan Tuesday, Peace warned that the $35-billion shortfall has been “substantially worsening” by “billions” of dollars since the first of the year.

In an indication of the depth of the problem, the Franchise Tax Board, tallying tax payments received since April 15, reported that the state’s take is $600 million below Department of Finance estimates.

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Times staff writers Dan Morain, Gregg Jones, Jeffrey L. Rabin and Carl Ingram contributed to this report.