Davis Deficit Set Too High, Analyst Says

Fueling the debate in state government over the size and significance of California’s fiscal problems, the nonpartisan legislative analyst concluded Wednesday that Gov. Gray Davis has overstated the state’s budget gaps for this year and next by $3 billion.

Davis has estimated that the deficit for the remaining five months of this year and the projected shortfall for 2003-04 amounts to $34.6 billion. Legislative Analyst Elizabeth Hill, relying on different predictions for when California’s economy may turn around, said Wednesday she believes that the governor has underestimated revenue by about $2.5 billion and overstated projected spending by about $500 million.

Those figures disappointed some Republicans who had hoped that Hill would join them in saying that Davis had wildly exaggerated the shortfall to justify tax increases. Still, the analyst’s report also accused the governor of padding his budget with an additional $5.5 billion in spending programs and then claiming credit for cutting those programs to balance the 2003-04 spending plan.

The effect of that approach, Hill said, is to make it appear as if Davis cut more from the budget than he actually did. Though Davis has said he would make up the state’s projected shortfall mostly with cuts, Hill said most of the gap actually would be covered through tax increases. Those programs have “been put in the governor’s proposal both as a problem and a solution,” Hill said, when they don’t need to be there at all.

Both Democrats and Republicans immediately claimed that Hill’s report bolstered their positions.

“There’s really now very little disagreement between the analyst and the Finance Department as to the size of the problem,” Davis said, defending his analysis of the budget but adding that he would be happy if Hill’s projections of state revenue proved more accurate than his own.

“I would be thrilled if the analyst was right,” he said, “because my problem would be $3 billion less than I think it is.”

Republicans said, however, that when the nonexistent spending and cuts are factored into the calculations, the difference between Davis’ budget estimate and Hill’s is actually quite large. Hill is pegging the state’s actual shortfall over the next 17 months at $26.1 billion; the governor says it is $34.6 billion.

Most of the difference -- $5.5 billion -- is made up of those programs Hill said Davis unnecessarily added.

The remaining $3 billion is the result of an economic forecast used by the legislative analyst that predicts that the economy will turn around by the middle of this year, instead of continuing to slump well into 2004, as the administration predicts.

Assemblyman John Campbell (R-Irvine), vice chairman of the Assembly Budget Committee, accused Davis of inflating the projected gap to scare the public into accepting tax hikes and give the appearance that he was proposing more cuts than he actually was.

“The governor changed his budget to make this deficit seem unmanageable and coerce the public into accepting tax increases,” he said. “I do not accept that they didn’t play with billions of dollars in coming up with that number. They clearly did.”

He cited Hill’s finding that Davis proposes to make up 60% of the shortfall with tax hikes, not 40%, as the governor says.

Davis Criticized

Republicans said they will not vote for a single tax increase, and continued to criticize the governor for proposing $8.2 billion in tax hikes when he unveiled his budget plan last week. The plan includes increases in taxes on sales, tobacco and the income of high-earners.

“State spending needs to be brought under control,” Campbell said. “It is simply wrong to ask hard-working California families to be further burdened with living their lives by raising their taxes.”

Some economic analysts said the accounting methods used by the Davis administration may have painted a picture that is overly alarming.

“When you make the shortfall very, very large by adding in things you want to increase but maybe can’t and then don’t tell anyone about it, you end up with a number that scares people,” said Stephen Levy, director of the Center for the Continuing Study of the Economy, a research group in Palo Alto.

“That’s not really a good path to a solution,” said Levy, who agreed with Davis that the state’s fiscal problems should be solved with at least some tax hikes. “But it is good politics.”

Davis administration officials said they didn’t inflate the figures at all, but simply used the standard accounting procedures that have been employed by California governors in crafting budgets for nearly two decades.

“This is a difference of procedure that to the best of our knowledge has always existed between the Department of Finance and the legislative analyst’s office,” said finance Director Steve Peace. “No one can recall a time when Finance has done this differently.”

He said the department is obligated to account for all government programs in its budget proposal, even those that have no funding obligation.

Peace described a no-win situation for the department. He said that if administration accountants left out spending that Hill said did not need to be in its budget proposal, critics would accuse the administration of “secretly cutting programs.”

Republicans disputed the contention that the administration used standard accounting methods.

Campbell accused the department of padding the deficit projection by adding -- and then cutting -- increases in education and health-care spending that would not have been included in past budgets if there was no funding for them.

Hill’s disclosure coincided with the start of Senate hearings into the $10.2-billion budget cuts Davis wants the Legislature to approve by month’s end in the current state budget, as distinct from the 2003-04 spending plan that he unveiled last week.

Hill’s report, which will be released in final form next month, does not break out the figures year by year.

Some of the deepest cuts were proposed for health-care programs for the needy, including Medi-Cal services for the elderly at nursing homes, testing children for diabetes, dental care and other benefits.

As a long line of witnesses stretched out of the hearing room and into the corridors, lobbyists for the disabled, nursing home employees, physicians, pharmacists, senior citizens and others warned that Davis’ proposed reduction or elimination of certain Medi-Cal health-care services would have potentially deadly consequences for recipients.

Davis estimated that the reduction would save more than $188 million between now and July 1 and $985 million more in the next fiscal year.

Among other things, Davis has called for an immediate 10% cut in rates paid to doctors, nursing homes and other health-care providers and an additional 5% cut next year. He called for doing away with such optional services as diabetes testing kits, rubber bedsheets, and podiatry and dental care for adults.

“These services are not truly optional. The [cuts] will cause needless pain, suffering and even death,” said Angela Gilliard of the Western Center on Law and Poverty.

Witnesses deplored the proposed reductions as false savings because sick people would get sicker if Medi-Cal services were cut. As a result, they would be forced into more costly care at emergency rooms and hospitals at taxpayers’ expense.

In emotional testimony, Rosie Enriques of Los Angeles, a nursing home employee, pleaded in Spanish with the committee to shield nursing homes from rate cuts.

Reduced payments to nursing homes would result in employee layoffs and a reduction in the quality of care, she said, her face flushed and her eyes filling with tears.

“Think with your hearts,” she said, pointing out that some day the lawmakers themselves may need nursing-home care.

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Times staff writers Gregg Jones and Jeffrey L. Rabin contributed to this report.