Davis Yields in Fight for Local Funds

Gov. Gray Davis acknowledged Wednesday that his proposal to end $4 billion in annual car tax payments to local governments is all but dead in the Legislature.

If so, the governor and lawmakers would be forced to find another $4 billion in spending cuts or tax increases to balance the budgets for this year and next, and an increase in the vehicle license fee -- so far opposed by Davis -- would become more likely.

After meeting with Los Angeles Mayor James K. Hahn and mayors of five other major cities Wednesday afternoon, Davis told reporters “there’s no indication” the Legislature would approve his proposal to cut the payments the state has made to local governments for four years.

“No such vote has passed,” said Davis. “No such vote has come close. No such vote is likely to come close in the foreseeable future.”

In 1998, the state reduced the vehicle license fee, money that goes to cities and counties, by two-thirds. At the same time, the state made up the difference to them. It’s that “backfill” that Davis now proposes to eliminate.

The proposal was a key element of the governor’s plan for bridging a budget shortfall estimated at more than $26 billion over the next 17 months. Local government officials said losing the $4 billion in backfill payments would devastate city and county budgets and jeopardize public safety.

Feeling the pressure from local governments, the Democratic-controlled state Assembly is attempting to force the governor’s hand by linking an increase in the vehicle fee with $3.5 billion in cuts the governor wants in the current state budget. The Assembly approved legislation Tuesday that made the cuts contingent on an increase of most vehicle fees to the 1998 level, which is 2% of a car’s value. Tripling the car tax would add $124 to the license fee paid by the owner of a vehicle valued at the state average of $9,200.

In a further bit of legislative ingenuity, Democrats exempted vehicles sold for less than $5,000 from the proposed increase and declared their assessment a “levy” rather than a “fee.” Unlike a fee, a levy takes effect immediately and can’t be overturned by referendum -- a course of action that Republicans and taxpayer groups are threatening.

Senate leader John Burton (D-San Francisco) said the Senate would consider similar legislation next week.

The mayors also met with legislative leaders as they stepped up pressure on Davis to abandon his proposal to end the assistance to local governments or raise vehicle license fees by an equal amount.

“What we’re saying is you cannot balance the state budget entirely on the backs of the cities,” Hahn said after the meeting with Davis.

Agreeing to Disagree

Hahn described the meeting as cordial, but he said Davis “was very clear with us that he’s very reluctant to support” higher vehicle license fees.

Davis says he opposes the proposed tripling of vehicle fees, but he won’t say whether he intends to veto the measure if it reaches his desk.

The governor also warned Wednesday that the state probably will have to borrow money from Wall Street at the end of the fiscal year in June to meet its obligations as the government starts the new bookkeeping year on July 1.

Davis did not indicate how much may have to be borrowed, but that it would be done by the sale of state “revenue anticipation notes,” a short-term loan device that has been used in the past to provide capital needed at the start of the new fiscal year.

The loans would be paid off at an unspecified interest rate when state revenues improve.

The governor said California finance officials will travel to Wall Street next week for an annual conference with credit rating agencies, where they will detail the state’s troubled fiscal condition.

Because the state’s credit rating may be at stake, Davis indicated that the meeting would provide additional pressure on lawmakers to move swiftly on budget cuts, and that they may need to be far more severe than lawmakers have been willing to be so far.

He warned that before they loaned the money, bankers would demand proof that the state could pay off the loans.

“They [bankers] don’t want cuts that are problematical. They want cuts that are real,” Davis told reporters at an impromptu press conference following his meeting with the mayors.

Oakland Mayor Jerry Brown, the former governor, suggested that local governments will ultimately hang on to their $4 billion in annual “backfill” payments from the state because Davis can’t end the payments without a change in the law -- and the Legislature won’t send him the legislation that he’ll need to change the law, said Brown.

The mayors warned of potential catastrophic cuts in local services, including police and fire protection. Local governments and representatives of police and fire units from around the state have descended on the Capitol in large numbers in recent days to pressure the Legislature to either scrap the Davis proposal or increase vehicle license fees to make up for the loss in state funds.

“The math for all of us is very simple,” Hahn said at a press conference with other mayors earlier in the day.

He and Brown were joined in the meeting with Davis by San Jose Mayor Ron Gonzales, Long Beach Mayor Beverly O’Neill, Sacramento Mayor Heather Fargo, Santa Ana Mayor Miguel Pulido and Los Angeles City Council President Alex Padilla.

“If you take the amount of money from the cities that’s been talked about, you take cops off the streets, you take firefighters off their rigs, you close down parks, you shutter the libraries,” Hahn said.

Davis’ proposal would cost the city of Los Angeles $175 million over the next 17 months, he said, or the equivalent of 2,333 police officers.

“That would jeopardize the safety of the people of Los Angeles,” said Hahn.

Small cities would be hurt even worse than big cities, he added. For some smaller cities, the elimination of the vehicle funds “would wipe them out,” Hahn said.

The bill to triple vehicle license fees passed the Assembly on largely partisan lines on a majority vote. Minority Republicans cautioned Democrats against counting on any new money from a higher car tax.

Sen. Tom McClintock (R-Thousand Oaks) said he plans to file a petition for a referendum if the Legislature and Davis adopt the bill, AB 4X by Assembly Speaker Herb J. Wesson Jr. (D-Culver City). Such a petition would suspend the law for 90 days, during which McClintock must gather 373,000 signatures to allow voters to decide at the next general election whether the law should take effect.

‘Is It a Tax Levy or Not?’

“Is it a tax levy or is it not a tax levy?” said McClintock. “If it’s a tax levy it requires a two-third vote. If it’s not a tax levy, it’s subject to referendum.”

He called the bill a sign of the “contempt” Assembly Democrats hold for the state Constitution.

Though most tax increases require a two-thirds vote of the Legislature, the Wesson bill qualifies as a tax levy needing only a majority vote because it includes a tax reduction, according to the legislative counsel’s office. The bill reduces fees for people who bought their cars for less than $5,000.