Davis Calls for Severe Cuts, Tax Changes

Warning Californians of severe cuts in state services, Gov. Gray Davis said in his annual State of the State speech Wednesday that he won’t sign the next budget unless the Legislature approves “substantial” changes in the tax structure.

Davis didn’t offer any specifics but said he will ask lawmakers to consider several proposals, including restoration of the governor’s authority to make midyear budget reductions during difficult years -- an authority governors possessed until 1983, he said.

“I don’t have all the answers,” said the governor, addressing the Legislature in the Assembly chamber. “None of us do. But I will lead the discussion. And I will not sign a budget without substantial structural reform. We simply must end the budget roller-coaster ride.”

The speech -- the first State of the State address of Davis’ second term -- capped a weeklong effort to rally Californians and ease the shock of his plan to bridge a projected $34.8-billion budget gap over the next 18 months. On Friday, he is expected to recommend tax increases and cuts in dozens of popular programs in his budget blueprint.

Reaction to the speech split predictably along partisan lines in the Legislature. Democrats cheered his proposal to speed up the expenditure of school and water bond money to create jobs, while Republicans scoffed, saying they fully expect him to propose tax increases when he unveils his budget Friday.

“You don’t create jobs by raising taxes,” said Assembly minority leader Dave Cox of Fair Oaks.

Describing his spending plan as “one of the toughest budgets ever presented to the Legislature,” Davis warned of deep cuts and promised a “balanced” approach -- Capitol code for tax increases.

In a rhetorical shot at Republicans and other critics who accused Davis of dodging tough budget choices last year in order to win reelection in November, the 60-year-old Democrat added: “My budget makes hard choices. We have faced the problem head-on. There are no gimmicks. No tricks. No evasions.”

He urged the Legislature “in the strongest possible terms” to approve $10 billion in measures to reduce the deficit he proposed last month. These included a reduction of $3.1 billion in funding for public education over 18 months.

As the staggering scope of California’s financial crisis has become clearer in the last two months, Davis has suggested several times that he aspired to do more than merely balance the budget.

In Wednesday’s speech, he issued an explicit challenge to the Democratic-dominated Legislature.

“Our current fiscal structure has not been updated in 25 years to reflect either changing demographics or our changing economy,” he said. “Our budgets have become painfully dependent upon extremely volatile sources of revenue, constraining our ability to make long-term vital public investments. It’s high time to free ourselves from this boom-and-bust syndrome.”

Davis said he will solicit ideas from legislative leaders and “major stakeholders” on how to shield state government operations from the wild swings in economic cycles.

Facing a more skeptical audience than he did during Monday’s inaugural address, Davis was interrupted by applause six times during the 25-minute speech.

The first applause came as he briefly summarized his first-term achievements: improvements in public education and greater access to higher education; expanded health coverage for children; tougher environmental protection; and new laws on gun control, abortion rights, stem-cell research, global warming and paid family leave.

Unlike the State of the State addresses in the first three years of his first term, when the budget was awash in surplus, Davis proposed no expensive new initiatives.

Characterizing the current crisis as “a challenge as great as any in our state’s history,” he repeated a pledge he made Monday to create 500,000 new jobs over the next four years.

“My most immediate priority can be summed up as jobs, more jobs and even more jobs,” Davis said.

He provided more details on how he plans to do that: accelerating the release of $21 billion in voter-approved bonds for schools, affordable housing and water projects, for example.

In making the case that economic recovery is the primary focus of his second term, Davis borrowed some of the same language he used four years ago to emphasize his commitment to improving public schools in California. He pledged to “focus like a laser beam on two [economic] sectors that promise high growth and high wages” -- homeland security and life sciences.

Davis won praise from the business community by recommending an extension of the $420-million “manufacturers’ investment credit,” a tax break denounced by groups opposed to deep cuts in social programs.

The governor also directed Small Business Advocate Sonya Blake to oppose “all regulations that unfairly impact on small business” and review existing regulations with an eye toward changes that “promote growth and new jobs.”

In another show of support for business, the governor said he will ask the Public Utilities Commission to create an Office of Economic Development to review major proceedings before the commission to determine “their benefit to the economy, infrastructure and job creation.”

Davis won the loudest applause -- and appeared emotional -- when he introduced 10-year-old Anies Garcia of Whittier, a survivor of heart and kidney transplants, and Dr. Bob Ettenger, who helped develop the medicine that prevented her body from rejecting the transplanted organs.

Davis cited the pair as exemplifying the “higher purpose” of the life sciences industry and the governor’s proposal for a Life Sciences Initiative to increase the number of qualified lab technicians, simplify the transfer of technology from the University of California, and increase access to venture capital and federal grants.

“For those of us who’ve experienced the pain of watching a loved one slip away, these aren’t just numbers on a ledger,” he said. “These are our mothers and sisters, our brothers, and our family and friends. And their stories summon us to focus our best skills and resources on building healthier, longer lives.”

Repeating a previous call for federal assistance during the current economic difficulties, Davis asked President Bush and Congress to fully reimburse states for the added costs of homeland security since the Sept. 11, 2001, terrorist attacks.

“In the months that followed Sept. 11, no state did more to protect its people and vital assets,” Davis said. “State and local law enforcement officials have answered our nation’s call without question and without hesitation -- but they should not have to do it without compensation.”

Davis said he will establish a permanent state Office of Homeland Security to “coordinate security activities throughout the entire state” and “highlight the extraordinary technological capabilities of California’s private industry to help protect all Americans.” He named as director George Vinson, a former FBI and California Highway Patrol officer and current security advisor.

After the speech, Democrats embraced Davis’ promise to drastically reform how California raises and spends money.

But they were wary of his proposal to extend a tax break for manufacturers and create a permanent anti-terrorism office. And they said they were eager for more details of how Davis intends to restructure the budget.

“This was a very nice 30,000-foot flyover,” said Assemblyman Joe Canciamilla (D-Pittsburg), “but the details are really going to be critical.”

Republicans praised Davis for making job creation a priority -- but sarcastically suggested that he had done more for creating jobs in other states by signing a number of “job-killer bills” during his first term.

Cox urged Davis to ask the Legislature to repeal a number of bills supported by labor unions but opposed by the business community, including the mandatory eight-hour workday and an increase in workers’ compensation benefits.

“Overall, I would give the governor’s address a B-minus,” said Cox. “We share his goal of a strong California. In fact, we’re flattered that many of his proposals come from ideas we’ve offered before.”

Senate leader John L. Burton (D-San Francisco) said he will fight Davis’ plan to restore the governor’s power to cut the state budget without the Legislature’s approval. “Not in my lifetime,” he told reporters.

He also said he found it difficult to understand how Davis would renew a tax break for manufacturers at the same time he was “taking money away from blind, disabled and elderly people” to balance the budget.

Senate Republican leader Jim Brulte of Rancho Cucamonga dismissed Davis’ proposal to create thousands of new jobs as a short-term fix.

“We’ve hung out a sign at California’s border which says, ‘Jobs creators, go home.’ We’ve got to take that sign down.”

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Times staff writers Carl Ingram, Nancy Vogel and Jenifer Warren contributed to this report.