Davis Budget of 'Hard Choices' Spreads the Pain

Times Staff Writers

Gov. Gray Davis proposed a $96.4-billion state budget Friday that offers pain for almost every Californian, from tax hikes for the rich to reductions in medical care for the poor and elderly, and pointedly sidesteps the long-term "structural reform" that Davis has said is necessary.

The budget also shifts $8 billion in programs, along with the revenue to fund them, to county governments. Although Davis stressed that he tried to spare children from the harshest cuts, the budget would cost California school districts $5.4 billion. Local governments would lose $4.2 billion that they had expected from vehicle license fees.

"These are hard choices," Davis told reporters at a packed Capitol news conference. "I did not like making them. But the buck stops with me, and I had to make them."

Faced with a budget gap that he estimated at nearly $35 billion over the next 18 months, the Democratic governor said he had no choice but to sharply reduce government services and raise taxes. But his proposals came under immediate attack from Republicans in the Legislature, who said they could not accept any tax increases.

"This budget will not pass the Legislature as presented, not with $8 billion worth of job-killing tax increases," said Assemblyman John Campbell (R-Irvine), vice chairman of the Assembly Budget Committee. "That will not happen. Republicans will not vote for that."

Although Democrats control both houses of the Legislature, Davis needs the votes of at least two Republicans in the state Senate and six in the Assembly to win the two-thirds majority he will need to pass any budget.The tax increases include a jump of as much as two percentage points in personal income tax rates for the richest Californians, a 1-cent increase in the general sales tax, a $1.10-per-pack increase in cigarette taxes, a 0.25% surcharge on in-state telephone calls and a variety of added fees for state services. Fees at community colleges would more than double, from $11 to $24 per unit.

The sales tax increase would be effective July 1, assuming the budget is passed by then. The personal income tax increase would be effective for the 2003 tax year.

The budget also counts on $1.5 billion in new revenues from Indian casinos, although administration officials acknowledged that the figure is an estimate based on a revenue-sharing agreement that has not been reached.

In all, the budget proposes $11.8 billion in spending cuts in the fiscal year that begins July 1, on top of $10.2 billion in midyear cuts already proposed for the 2002-03 budget. The state's neediest residents would take some of the biggest hits. Eligibility for the low-income Medi-Cal program would be tightened, and entire classes of benefits for poor adults would be eliminated, including hospice care, optometry, artificial limbs and hearing aids. There would be cutbacks in Supplemental Security Income grants for the blind, elderly and disabled.

Nearly every state agency or recipient of state dollars would face leaner times.

The University of California and the California State University system would each face cuts of about 10% in state aid, a total of about $700 million.

Davis said he would cut at least 1,900 state jobs, some through layoffs. He issued a thinly veiled warning to public employee unions, saying he hoped to save $500 million by renegotiating public employee contracts. "Maybe, at the end of the day, certain bargaining units decide they would rather not take concessions, and they would rather make the savings through layoffs," the governor said. "So the layoffs number could rise based on the outcome of those negotiations."

The budget assumes only sluggish growth in California's economy this year, leading to modest growth in 2004. State Finance Director Tim Gage said it is based on a "reasonable, conservative forecast."

In his inaugural address earlier this week, Davis called for structural reforms that would "wean state government off the feast-and-famine budgeting it's experienced for generations."

Aside from the shift of $8 billion in social service programs from the state to county governments, an extension of a realignment begun by Republican Gov. Pete Wilson, Davis offered no such reforms in his budget. Instead, he called on the Legislature to work with him to find solutions that would insulate the state from boom-and-bust economic cycles.

The most recent such cycle was perhaps the most dramatic in California since the Gold Rush, and left the state staring down a mine shaft into its deepest budget shortfall.

Sacramento had fattened up during the economic boom centered in Silicon Valley in the late 1990s, reaping billions from taxes on stock options and capital gains. When that collapsed, California lost $6.2 billion in personal income taxes overnight, most of it from the state's wealthiest taxpayers, opening the budget gap that Davis most recently estimated at $34.6 billion between now and July 2004. Others say the shortfall is considerably less -- but still substantial.

Among the ideas Davis broached Friday -- but did not endorse -- were creating a rainy-day reserve fund, reconfiguring the state's tax "portfolio," spinning off more programs to local government and requiring reviews of all tax breaks.

"I am determined to lead the discussion and to sign into law structural reform, contemporaneous with my signing of the budget," Davis said.

That statement, along with Republican reaction, suggest the degree to which the budget proposed Friday could be only the vaguest guidepost to the document that is ultimately passed later this year. By law, the budget must be signed into law by July 1, although there is no penalty for missing the deadline. Last year, legislative gridlock delayed its passage until September.

"I can't tell you precisely how we get from here to there, but all of us were elected to solve California's problems, whether conservative Republican or liberal Democrat," Davis said. "We have to face reality and balance our books so we can continue making progress in the state."

Reaction from Republicans spanned the spectrum from skepticism to contempt.

"Two hundred years ago when people were sick, doctors put leeches on patients thinking they were being helpful, but they weren't," said Senate Republican Leader Jim Brulte of Rancho Cucamonga. "They were helping kill the patient. Raising taxes when you have a sluggish or anemic recovery doesn't help the recovery; it hinders the economy."

Democrats largely welcomed Davis' proposals, although they said they had yet to study the plan in depth.

"I'm glad that the governor agrees with most Democrats in the Legislature that the approach to deal with this problem has to be a balanced approach, which includes cuts and tax increases," said Assembly Speaker Herb Wesson (D-Culver City). "We need to go through his proposal element by element, and we will begin doing that on Monday when we return."

Jenny Oropeza (D-Long Beach), chairwoman of the Assembly Budget Committee, commended the governor for fully funding the Healthy Families program for children, although she said even that proposal "will require significant study."

Davis said he protected Healthy Families, a health insurance program for poor children, in an effort to cushion the impact of the budget crisis on children. He said he also tried to avoid deep cuts in education, which was protected to some extent by Proposition 98, which requires that about 40% of state spending go to schools. Although state per-pupil expenditures would increase slightly -- less than the anticipated rate of inflation -- the budget includes cuts in spending on programs mandated by the state, such as school safety. In return, school districts would get more flexibility in how they operate those programs.

Scott P. Plotkin, executive director of the California School Boards Assn., anticipated that the $5.4 billion in school cuts would require layoffs.

Still, he said he sympathized with Davis. "The governor was in a tough spot," Plotkin said. "He had no choice."

John Hein, who oversees governmental affairs for the California Teachers Assn., was considerably less conciliatory. "This is an outrageous mess that is unlikely to see the light of day," he said. "We want the same protection they gave Corrections."

Davis' budget proposes very small cutbacks for the Department of Corrections. Prison guards have been among his largest campaign contributors.

"I don't know what happened to the governor who said that education was his first, second and third priorities," Hein said. "Maybe now he is the governor who believes Corrections is his first, second and third priorities."

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(BEGIN TEXT OF INFOBOX)

Breaking down the state budget

Gov. Gray Davis proposed raising taxes and cutting spending Friday to offset the state budget shortfall.

Winners and losers

Schools, cities and Medi-Cal took the hardest hits in the proposed budget, with assistance for children and families the only gainer.

In millions

Local government: -$2,929

K-12 education: -$1,723

Medi-Cal: -$1,020

UC, Cal State: -$700

Welfare benefits: -$662

Redevelopment agencies: -$250

Health and welfare: +$202

Tax increases

The bulk of new revenue would be generated by a 1-cent sales tax increase and an income tax hike for the wealthy, among other proposed solutions.

In billions

Tax:

Sales

New revenue: $4.6

Tax:

Income

New revenue: $2.6

Tax:

Cigarette

New revenue: $1.2

Tax:

Indian gambling*

New revenue: $1.5

Total$9.9

Revenue sharing agreement

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Source: Department of Finance - Researched by Times reporter Doug Smith

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Times staff writers Carl Ingram, Gregg Jones, Doug Smith, Dan Morain, Jeffrey Rabin and Nancy Vogel contributed to this report.

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