Major Candidates Vague on Solving State’s Fiscal Woes

In the opening days of California’s gubernatorial recall campaign, some leading candidates have offered barely a hint of how they would cope with the main issue that has fueled the drive to oust Gov. Gray Davis: the state’s fiscal crisis.

Davis and the Legislature relied heavily on borrowing to close a $38-billion budget gap this year. As a result, the governor -- Davis or a successor -- will confront a new shortfall of $8 billion or more within months.

Even the few broad outlines sketched by some recall candidates so far fail to account for that gap.

The one point of agreement among nearly all major candidates is a plan to repeal the recent tripling of the vehicle license fee, also called the car tax, a move that would deepen California’s budget hole by an additional $4.2 billion a year.

Though the budget mess is certain to dominate the governor’s job for years, political strategists say it is no surprise that candidates have sought, by and large, to avoid specifics on how they would clean it up.

“Any realistic discussion of it is really offering a choice between a punch in the nose and a knee to the groin, and no one wants to inflict pain on the voters when they’re soliciting their votes,” said David Axelrod, a Democratic campaign ad maker.

For three years, state lawmakers have put off many of the hard choices involving higher taxes or sharp program cuts, choosing instead to borrow billions of dollars to finance the government. The mounting debt will aggravate the state’s fiscal troubles for years.

In response to a Los Angeles Times questionnaire asking how they would confront the budget, Davis and six of the seven leading contenders to replace him laid out at least some of their positions Friday. Only Arnold Schwarzenegger declined to respond.

So far, Republicans Tom McClintock and Bill Simon Jr. -- competing for the votes of conservatives -- are the only ones to focus relentlessly on the fiscal crisis as they campaign.

They promise to cut billions in spending, although budget experts are skeptical of their projections of savings to be realized by wiping out what they call waste, fraud and abuse. They have not explained how they would push their proposals past the Democratic majority in the Legislature, which refused to go along with cuts proposed by its own party’s governor.

The leading Democrat in the race, Lt. Gov. Cruz Bustamante, plans to release his agenda for fiscal recovery on Tuesday. It will call for $7.2 billion in tax hikes, mainly on alcohol and tobacco, and more frequent reassessments of commercial property. He also will propose $4.5 billion in largely unspecified spending cuts and savings, including $500 million from fighting Medi-Cal fraud.

Bustamante is the only major candidate who would not entirely reverse the hike in the car tax. He argues that it imposes an unfair burden on low-income Californians, so he would rescind the increase for only the first $20,000 of a vehicle’s value. The proposal could appeal to many Democrats, though it is sure to anger Republicans, who strongly oppose the tax.

On budget matters -- as on other issues affecting the state -- the vaguest candidate is Schwarzenegger. When he announced his candidacy, he promised to abolish the car-tax hike “the second I walk in the office.” He called later for building more schools and hiring more teachers.

But apart from his vow to create jobs -- “We have to make sure everyone in California has a fantastic job,” he said -- Schwarzenegger has not explained where the state would find the money to pay for his proposals. In the absence of other plans to cut costs or raise revenue, they would swell the budget gap to more than $12 billion a year.

Schwarzenegger has spurned efforts by the media to press him for details on his approach to state finances. In the first 11 days of his 62-day campaign, he has turned down all interview requests from California journalists with one exception: Pat O’Brien of “Access Hollywood,” who did not press him on fiscal matters.

Schwarzenegger spokesman Sean Walsh said the “Terminator” star would apply to the budget the same principles that made him “tremendously successful” as a bodybuilder, actor and investor: He “strategically analyzes, processes and then aggressively acts upon information he has.”

To shape his fiscal agenda, Schwarzenegger is seeking recommendations from a panel of economic advisors led by investor Warren Buffett and former Secretary of State George P. Shultz. Buffett suggested last week that Californians pay too little in property taxes, thanks to Proposition 13, but Schwarzenegger aides said the actor still backs the 1978 tax-revolt measure.

Still, Walsh declined to say whether Schwarzenegger might support higher taxes to balance the budget.

“We will be rolling out our policy positions and vision for California on our timetable,” Walsh said.

With no concrete budget plans from Schwarzenegger, the campaign of the leading Democrat, Bustamante, is attacking the actor for trumpeting his success in winning voter approval last year of Proposition 49, a bid to increase public spending on after-school programs.

The initiative would boost such spending by as much as $455 million a year, but only after tax collections returned to the peak levels of the dot-com boom. Because no Proposition 49 money has been disbursed so far, Bustamante strategist Richard Ross said it was “a cynical ploy” for Schwarzenegger to cite it as an accomplishment.

“It is as make-believe as his movies,” Ross said.

Another Republican candidate, Peter Ueberroth, who is running a nonpartisan campaign, has made almost no public remarks on the fiscal crisis, but he plans to start unveiling his economic plan this week. His campaign manager, Dan Schnur, said that there was “no reason to rush out in the middle of a media tsunami” created by Schwarzenegger, but that budget proposals would be “a major component” of his economic revival plan.

In an interview, Ueberroth called for new “revenue building,” but declined to be specific. In response to the questionnaire, he sidestepped the question of whether he would approve any tax hikes, saying tax rates would be lower by 2007 -- when the governor’s term is due to end -- than they were when Davis took office in 1999.

Ueberroth also vowed to cut state costs by 5% and scour agencies to find and abolish wasteful spending. He promised a hiring freeze and a review of state employment contracts, but did not specify how much money that would save.

Arianna Huffington, a former Republican running without affiliation, vowed to close corporate tax loopholes, raise property taxes on businesses, freeze spending, fight reductions to schools and health care and slash the state’s “bloated” prison budget.

Green Party candidate Peter Camejo promised a 1% income-tax increase for the richest third of Californians and cuts in prison spending. He vowed to spare health-care programs and avert layoffs or pay cuts for state workers.

Simon, the GOP gubernatorial nominee who lost to Davis in November, promised to “audit every square inch of government” to “root out waste, fraud and corruption.” He vowed “broad cuts across all categories of government spending,” including “targeted reductions in bloated health and welfare programs.” Like McClintock, a Republican state senator from Thousand Oaks, Simon promised no new taxes.

McClintock said “aggressive enforcement to stop Medi-Cal fraud,” along with his proposed reform of the insurance system for workers injured on the job, would save the state $2 billion. He also would set up a commission to slash unneeded bureaucracy.

In addition, McClintock proposed letting private companies compete to provide some state services at a lower cost. He promised large cuts in the size and cost of the state work force.

For his part, Davis said he supports repeal of the car-tax hike, which was not part of the budget he proposed in January -- though he has allowed it to take effect over Republican objections. To make up for the lost $4.2 billion, he would raise taxes on cigarettes and the income of the richest Californians.

Overall, he said, he would continue to support a balanced approach between spending cuts and, if needed, “responsible revenue increases.” He cited schools, health care and public safety as his top priorities.

UCLA economist Tom Lieser said voters should not expect instant solutions to the chronic imbalance between what California spends and what it collects in taxes. “It took us a long time to get here,” he said. “We’re not going to solve the problem overnight. It doesn’t end with the election Oct. 7.”

Jean Ross, executive director of the California Budget Project, said no candidate has yet produced a realistic plan. “There is no meat there,” said Ross, whose group studies the budget’s impact on low- and middle-income Californians. “They’re not offering choices that would stand up to close scrutiny.”

*

(BEGIN TEXT OF INFOBOX)

Candidates answer questions about the state’s finances

The Times posed a set of questions about the state budget to Gov. Gray Davis and seven major candidates seeking to replace him. Excerpts of the responses from the governor and six candidates follow; a spokesman for Arnold Schwarzenegger said he would not respond. During the course of the campaign, The Times plans to ask the candidates about other major issues facing the state.

*

Q: Do you favor or oppose repealing the car tax increase that went into effect this year? If you favor repeal, please specify what programs you would cut or taxes you would increase to offset the approximately $4 billion in revenue the increase is expected to generate.

Gov. Gray Davis (D): I favored increasing taxes on upper-income earners and on cigarettes. I would support reducing the vehicle license fee so long as it does not come at the expense of local police and fire departments, which are the primary beneficiaries of the fee. I believe the Legislature’s proposal to swap the car tax increase with taxes on upper-income earners and cigarettes makes sense.

Peter M. Camejo (Green): Increase the income tax on the richest 1/3 of 1%, so that they pay the same tax rate as the poorest 20% of the population.

Arianna Huffington (I): I am in favor of repealing the car tax increase. I plan to close corporate tax loopholes and tax shelters, and end the insufficient assessment of commercial property. Together, those moves can offset the revenues lost on the car tax repeal.

Lt. Gov. Cruz Bustamante (D): I propose that we exempt the first $20,000 of every automobile’s value from the increase in the car tax. This will return $2 billion to the taxpayers. I propose the revenue loss can be made up by increases in tobacco and alcohol taxes.

Peter Ueberroth (R): The car tax must be repealed. It disproportionately impacts the California motorists who can least afford this increase.

Arnold Schwarzenegger (R): Declined to respond.

Bill Simon (R): I will cut the car tax increase as quickly as possible. I will not offset this with other tax increases, but rather, with cuts in government spending. I believe that the $3 billion in tax relief provided by this can be made up with targeted reductions in bloated health and welfare programs and broad cuts across all categories of government spending.

State Sen. Tom McClintock (R): My first act as governor will be to rescind Gray Davis’ tripling of the car tax. I would offset the general fund backfill expenditures with $2.5 billion in savings to state and local government that will accrue from my workers’ comp reform and aggressive enforcement to stop Medi-Cal fraud that will save approximately $2 billion annually.

*

Q: Would you propose or sign into law any increase in taxes or fees as part of an effort to balance the state budget? If so, which ones and how much? If you would rule out tax or fee increases, where, specifically, would you cut spending?

Gov. Gray Davis (D): The budget I proposed in January of this year included a balanced combination of spending reductions and revenue increases. I would not support an increase in homeowners’ property taxes.

Peter M. Camejo (Green): See question 1

Arianna Huffington (I): Yes. I intend to reverse the trend that has seen an increase in the property tax burden placed on homeowners, and a decrease in the share paid by corporations. They used to provide 14% of our state’s tax revenue. Today they provide only 8%.

Lt. Gov. Cruz Bustamante (D): I propose that we increase a variety of taxes including tobacco and alcohol, close corporate tax loopholes, and reassess commercial property with the same frequency that we reassess homeowner property.

Peter Ueberroth (R): When I leave the governor’s office, the economy will be growing and California will be in the top 25% of states in economic growth, tax rates will be lower than when Gray Davis took office in 1999, and there will be a constitutional limit on state spending to ensure that the politicians will never again spend us into a budget crisis.

Arnold Schwarzenegger (R): Declined to respond.

Bill Simon (R): No, we have a spending problem, not a revenue problem. We should base our budget on the level of government that we had in the mid-1990s, before the current cycle of revenue boom and bust spending got started. For the 2004-05 budget we will make broad cuts across all categories of government spending that will roughly bring expenditures into line with 1996-97 spending levels, adjusted to reflect inflation and population growth.

State Sen. Tom McClintock (R): I will not raise any taxes or fees, PERIOD. I would immediately begin implementing reforms suggested by the Reason Foundation and the Performance Institute to eliminate duplication among departments, introduce competitive bidding for state services and institute performance based budgeting - reforms that can save an estimated $15 billion while providing improved service delivery.

*

Q: Do you favor a fixed cap on the total level of state spending? If so, what would the cap be?

Gov. Gray Davis (D): Clearly, something must be done to end California’s feast-or-famine system of budgeting. I am interested in some form of reasonable restraint on spending.

However, a rigid cap on spending -- which would limit our ability to make sensible investments in schools and health care -- would be too extreme.

Peter M. Camejo (Green): No. The state needs flexibility.

Arianna Huffington (I): Until the current budget crisis is over and the economy recovers, I favor a freeze on total current spending, with allowances made for inflation and population growth.

Lt. Gov. Cruz Bustamante (D): I do not favor a fixed cap. I believe that we need to allow our state’s economy to grow, creating jobs and increasing people’s incomes.

Peter Ueberroth (R): I favor a limit to the annual growth of state spending. Our spending will reflect the increase in our state’s population and the rate of inflation.

Arnold Schwarzenegger (R): Declined to respond

Bill Simon (R): Absolutely. I believe a spending limitation is essential to prevent the politicians from overspending in boom years, only to go bust during down cycles. For the 2004-05 fiscal year the state’s spending limit would be $73.5 billion.

State Sen. Tom McClintock (R): I am the author of Senate Constitutional Amendment 3, which would restrain the growth of spending to the combination of inflation and population growth. SCA 3 would also establish ‘rainy day’ reserve funds to protect vital services in economic downturns.

*

Q: Should the state constitution be amended to eliminate the required two-thirds vote to pass a budget or raise taxes? Should the state require a super-majority short of two-thirds to pass a budget or raise taxes?

Gov. Gray Davis (D): During this year’s budget process, we saw the minority party, Republicans, hold the budget process hostage. I understand that frustration with that behavior has prompted Californians to circulate an initiative that would eliminate the two-thirds requirement. It will be up to the people of California to decide.

Peter M. Camejo (Green): Yes. The will of the majority should rule in the area of taxes.

Arianna Huffington (I): Yes. This constraint has played a part in causing the political paralysis plaguing Sacramento. I believe a simple majority should be enough to pass a budget or raise taxes.

Lt. Gov. Cruz Bustamante (D): I believe that the voters were right to change the voting requirement for school bonds to 55%. We should apply that sensible standard to all revenue questions.

Peter Ueberroth (R): I oppose changing the required two-thirds vote. This provides California taxpayers with essential protection against tax increases.

Arnold Schwarzenegger (R): Declined to respond.

Bill Simon (R): The two-thirds vote is the people’s constitutional protection against runaway spending. I believe it is healthy for our state because it requires both parties to be involved in compromise solutions to these issues.

State Sen. Tom McClintock (R): The two-thirds requirement to raise taxes is a vital protection for the taxpayers against the tax and spend crowd here in Sacramento and must be vigorously defended as I have for 20 years.

*

Q: The state faces a projected $8 billion shortfall in next year’s budget. What programs would you target for reductions? Would you provide any money for K-12 education beyond the minimum required by Proposition 98? Would you cut prison spending? Would you cut back on health care programs? Would you cut the size of the state work force? Would you support reductions in salaries and benefits for state employees?

Gov. Gray Davis (D): The solution to the $8-billion shortfall must be structural in nature. I am commissioning a group of distinguished Californians to provide financial guidelines to the Legislature and to me this fall. I believe the ultimate solution should include spending reductions, structural reform and, if necessary, responsible revenue increases. With next year’s budget, I will continue to fight for the values Californians share.

Peter M. Camejo (Green): Would you provide any money for K-12 education beyond the minimum required by Proposition 98? Yes. Would you cut prison spending? Yes. Would you cut back on health-care programs? No. Would you cut the size of the state work force? No. Would you support reductions in salaries and benefits for state employees? No.

Arianna Huffington (I): The budgets of many of our state’s most vital social programs have already been cut too far, so I would fight any further cuts to health care or education. While I will not allow the budget to be balanced on the backs of state employees, I do favor a meaningful hiring freeze. I am in favor of cuts in the state’s bloated $5.2-billion prisons budget. I would start by rolling back the $1-billion pay raise for prison guards signed into law by Gray Davis in 2002. We need to invest in schools, not jails--books, not bars.

Lt. Gov. Cruz Bustamante (D): I am releasing details of my proposals for $7.2 billion in new revenues, reductions in the car tax, along with cuts and savings of $4.5 billion. I believe that there is another $500 million in MediCal fraud that must be attacked. Senate Bill 2 has the potential to move 5 million working Californians off of taxpayer subsidized health programs and on to private insurance. The California Medical Assn. estimates this will save state and local taxpayers $2 billion.

Peter Ueberroth (R): I will call on the Legislature to reduce spending by 5%, commission a review of all state departments and agencies to identify wasteful spending. Education needs funding beyond Proposition 98. I also support the state spending limit that has been presented by the Howard Jarvis Taxpayers Assn. and others. This calls for half of the revenues that exceed the limit to retiring the state’s bloated debt and half to funding education, and [I] will campaign for its inclusion on the 2004 ballot and approval by the voters of California. I will freeze new state hiring until our budget allows for new hiring, and I will review state employment contracts to identify areas that might be negotiated to save the state money while guaranteeing fair compensation for state workers.

Arnold Schwarzenegger (R): Declined to respond.

Bill Simon (R): We’re spending more than we have, and until we get spending under control, everything is on the table. I will audit every square inch of government. We’ve got to root out waste, fraud and corruption. The 2003-04 budget did not address the state’s fundamental budget problem: overspending. The so-called solution was to borrow as much as possible and paper over the problem. However, if we base our budget on the 1996-97 levels, the 2004-05 revenues will be sufficient to sustain the 1996-97 level, adjusted for inflation and population growth. Over time, our revenues do grow and over time government can increase its expenditures. I don’t believe there will be additional funding beyond Proposition 98, at least not until we can enact necessary cuts. The number of state employees will be reduced, and for health and welfare recipients, eligibility standards and work requirements will be tightened to meet the levels permitted by federal law.

State Sen. Tom McClintock (R): The shortfall will be substantially larger than $8 billion. It is not a matter merely of reducing expenditures -- we must fundamentally change the way we spend that money. For example, California spends over $9,000 per pupil -- $270,000 for a classroom of 30 students -- but only a fraction of that money gets to the classroom. Prison costs in California are out of control and can be substantially reduced by competitive wages within the state system and contracting out services for low- and medium-security inmates. We can provide far better health-care coverage at far lower cost by using a prepaid, refundable tax credit to bring within the financial reach of every Californian a basic health plan of their choice. These reforms -- and others like them -- will allow us to substantially reduce the size and cost of the state work force.