Party Fissures May Force Deal on State Budget

As California ends its second week of the new fiscal year without a spending plan, a split is emerging among legislative Democrats over whether they should continue to hold out for tax increases or agree to a budget without them.

At the same time, the solidarity of Republicans is being tested too. GOP-supported spending reductions, released in the Assembly and Senate last week, contained a number of recommendations, including cuts in education, reduced enforcement of environmental laws and a proposal to delay kindergarten entry for some children.

Those notions split Assembly Republicans, five of whom refused to vote for their own party’s package, in some cases admitting that it was because they were uncomfortable with the cuts. But only one Republican, Assemblyman Keith Richman of Northridge, has said he would be willing to vote for a tax increase. Gov. Gray Davis highlighted the cuts called for in the GOP plan as evidence of what he called the Republican leadership’s willingness to sacrifice programs in its campaign to resist any tax hikes.

Faced with defections in both camps, some lawmakers now believe the state Senate will soon approve a budget that avoids tax hikes -- and thus garners Republican support -- and that borrows heavily into the future, essentially putting off California’s reckoning with its fiscal crisis until next year.

Some members of both parties could be expected to oppose such a resolution, but others believe that it might spare the state further pain, at least for now.

Under that scenario, lawmakers would grudgingly roll over more than $10 billion of the deficit into the future with loans from Wall Street and delay for another day addressing the underlying problem: the imbalance between what the state spends and brings in. The deficit would be wiped out with a bond issue, to be repaid over several years with existing state taxes. That would ease the crisis for this year, but it would create a deeper problem for next year.

Senators would then take off for summer break -- which technically begins Friday but traditionally does not start before agreement on the budget is reached -- and leave the Assembly with little choice but to consent to the plan.

“Since Republicans appear to be adamant in their resolve” to oppose any tax increase, “some number of Democrats are trying to figure out another way” to get a budget approved, said Democratic political consultant Gale Kaufman.

That resolve has been fueled by a threat from Senate GOP leader Jim Brulte to work to end the political career of any Republican who votes for a tax increase.

The rupture among Democrats has come just as the party was gaining momentum in its push for new taxes by exploiting vivid examples of the deep spending cuts proposed by Republicans, such as the plan that would force 110,000 students eligible to begin kindergarten in the fall to wait until next year.

But in private caucus meetings, some Democrats are saying that they are impressed by the Republican resolve on taxes and that it thus might be preferable to strike a deal now and avoid further delays that could do lasting damage to the state. With a $38-billion shortfall, California already has the poorest state credit rating in the nation, has warned thousand of state workers to expect layoffs, and will run out of cash by summer’s end.

Without a budget, payments to contractors on hundreds of road projects would stop July 20. Later in the month, payments to local schools and public colleges also would stop.

“Real people are going to have very serious impacts on their lives if we don’t come together,” said Senate Appropriations Committee Chairwoman Dede Alpert (D-Coronado).

Davis said Thursday that he expected at least one house of the Legislature within the next two weeks to pass a budget without the higher taxes he wants. The GOP “intransigence means it is unlikely we will see the revenues I envisioned,” he said.

Pushing the problem off another year probably would make the governor’s potential role in increasing taxes less of an issue in a recall election and allow Davis to blame the state’s inability to solve its fiscal problems on the stubbornness of Republicans. Democrats who are considering the no-tax-hike option say privately that a budget without tax increases would demonstrate to the public the kind of sacrifices required when spending for services is sharply curtailed, and would allow the party to build support for raising taxes another day -- possibly through a March 2004 ballot measure.

Alpert said that although the caucus remains committed to fighting for at least a half-cent increase in the sales tax, some members are concerned that they are reaching the point where holding out causes more damage than good.

“We are faced with the looming reality that by the time we get back Monday it will be mid-month, and we just can’t go forever,” she said. “The discussion in the caucus centers around the fact that we realize there are risks and expenses for not getting a budget in place.”

Such talk alarms Democrats who say they can’t see any circumstance under which they would vote for a budget with no steady new revenues.

“I don’t understand the push for a bad budget compromise at this point,” said Assemblyman Joe Canciamilla (D-Pittsburg). “But it wouldn’t surprise me if that’s what [the Senate] ended up lobbing over to us next week.

“There has been a growing chorus of rumors over the last couple of days that there have been at varying points agreement or very close to agreement being reached on a budget proposal,” he said.

Canciamilla expressed frustration with the governor’s comment that a budget without taxes is likely to get legislative approval. “It is awfully early to concede that,” he said. “The fact that the governor is saying it makes it much harder to not become reality.”

But it would take substantial defections for the Republicans to prevail on the budget. Democrats hold solid majorities in both houses of the Legislature, so many would have to join Republicans to achieve the two-thirds majority necessary to pass a spending plan.

This week could bring more pressure on the state’s elected leaders, as the UC and California State University systems are poised to adopt fee hikes, spreading the fallout of the state’s dismal financial straits into new corners of the electorate. That could translate into heightened public demands for a resolution to the standoff.

Some Democrats say they are concerned about the dangers of continuing to hold out. A spokesman for state Sen. Tom Torlakson (D-Antioch) said that the legislator is alarmed at the state’s progression down a path toward insolvency and that he is considering voting for a budget without new taxes.

Wall Street firms have warned the state that they are poised to further downgrade California’s credit rating if a budget is not passed soon. Such a move -- state securities are only a few steps above junk bond status -- would cost taxpayers hundreds of millions and cause significant losses to bondholders.

Getting enough votes for a budget without new taxes would be a challenge even if a significant number of Democrats signed off on it. Most Republicans say any budget they vote for must include a repeal of the vehicle license fee hike triggered by the Davis administration earlier in the summer.

So, the result probably would be a compromise that retains the vehicle tax hike and is opposed by the extremes of both parties.

Labor unions, education groups and health-care advocates are pushing the Democrats to keep fighting for tax increases. They say the public was shocked by what they saw in the Republican budget bills. In addition to the kindergarten proposal and other steep cuts to local schools, the GOP proposed abolishing the California Coastal Commission and making program changes that could cost hundreds of thousands of poor people their health insurance.

“It is to the advantage of the Democrats to take their time and help the public understand the budget is about choices like this,” said Kevin Gordon, executive director of the California Assn. of School Business Officials. “The Republicans have inadvertently given new hope to the half-cent sales tax. They no longer have the advantage they did when it was just a matter of no new taxes.”

Senate Budget Committee Vice Chairman Dick Ackerman (R-Irvine) called that “wishful thinking.”

Political analysts said that although the Democrats may have gained some traction, they are unlikely to generate enough public outrage to sway the Republicans from their anti-tax stand.

“My sense is voters don’t believe a lot of this,” said John Matsusaka, a professor of finance at USC and an expert in the politics of budgets. “They expect to hear horror stories. They were warned everything would get cut and the world would end during the Proposition 13 [property tax reduction] campaign, and it didn’t happen. It’s just chatter to them.”

Yet Matsusaka and many others say that even if the Republicans are able to hold the line on taxes, they won’t emerge victorious.

“Everyone is a loser in this,” he said.

Joel Kotkin, a senior fellow at the Davenport Institute for Public Policy at Pepperdine University, says both parties have become victims of their own ideologies. He and many other analysts say the Legislature blew it when it failed to reach a compromise that would have eased some of the costly regulations that have been a burden to businesses while raising the sales tax a modest amount.

“All the power is stuck in Sacramento, and the worst decisions are being made there,” said Kotkin, who has studied and written about trends in California since the 1970s. “These are the most gutless, useless politicians I have seen for as long as I have been watching. I think they should be ashamed of themselves, and I think their mothers should disown them.”

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Times staff writer Carl Ingram contributed to this report.