New Davis Budget Seeks to Cut Less, Borrow More

Battered by months of criticism over his budget choices and facing a campaign aimed at recalling him from office, Gov. Gray Davis will today unveil a revised plan that sharply reduces tax increases he proposed in January and restores about $2 billion in spending to education, health and public safety services, senior administration officials said.

The governor’s revised 2003-04 budget will cut in half proposed increases in the cigarette tax and the state income tax on top earners and eliminate a proposed 1-cent increase in the state sales tax, said the officials who spoke on condition they not be identified. But Davis will separately propose a half-cent increase in the state sales tax to pay off the projected $10.7-billion deficit that California will face when the fiscal year ends June 30, the officials said.

Republican legislative leaders first proposed the plan to borrow money to cover part of the budget shortfall, projected at up to $35 billion over the next 13 months. But they opposed creating new taxes to pay for it.

The revised budget assumes an increase in the vehicle license fee that California drivers annually pay, raising about $4 billion -- an increase that administration officials and Democratic legislators said will be triggered automatically by the state’s dire financial condition. Republicans, however, have said they would contest any increase in court.

In another significant departure from his January budget, Davis will scrap much of his proposed plan to shift $8 billion in state services to local governments. Instead, he will propose the “realignment” of about $1.8 billion in programs to local governments, to be paid for by an increase in the cigarette and income tax on top earners -- about half the size of the increase in those taxes the governor initially sought.

Until now, Davis’ budget had advocated a single-year solution to the enormous gap between state tax collections and spending. But Democrats and key constituencies criticized the $20 billion in program cuts and savings it proposed and Republicans condemned its $8.3 billion in tax increases.

In the revised budget, Davis has conceded ground on both fronts in the interest of compromise, aides said.

“He was trying to put together a consensus document,” one senior official involved in the discussions said. “This is [Davis] trying to get a workable budget and get the Legislature to a point of passing a budget on time. This isn’t about currying political favor with people.”

But political concerns factored in the governor’s thinking, some people familiar with the discussions said. Aides said Davis hopes that adopting the rollover of the deficit and reducing the size of his proposed tax hikes will generate Republican support for the budget and that reducing the size of cuts in certain programs, including education, will draw Democratic backing.

Despite rolling back some of the cuts deemed most onerous by lawmakers and interest groups, Davis’ proposal still urges spending cuts as half the solution to the state shortfall, aides said.

One senior official said the choices in the governor’s revised budget reflect “a sense of the values he’s trying to communicate in terms of what’s important. Education and public safety really receive star treatment in this budget.”

Davis will restore hundreds of millions of dollars in health-care cuts he proposed in January, including a recommendation to slash eligibility in the Medi-Cal health program for the poor and disabled. Davis had recommended in January restricting eligibility to people with incomes equal to 60% of the federal poverty level, but his revised budget will leave the income eligibility level unchanged at 100% -- $18,400 of annual income for a family of four.

Davis also will restore the Medi-Cal prosthetics benefit, one of the 18 optional benefits he had recommended cutting.

The governor, however, will stand by his recommendation to review Medi-Cal eligibility on a quarterly basis, compared to the current annual review. More frequent reviews will reduce participation in the program, health experts said. Lawmakers recently proposed semiannual reviews as a compromise, but Davis aides said that restoration of income eligibility levels to 100% of the federal poverty level will reduce most of the impact of the quarterly reviews.

Responding to some of the sharpest criticism of his January budget, Davis will propose restoring $708 million to K-12 education, the administration officials said. In another concession to teachers and school administrators, the remaining cuts to education will target areas “that are farthest away from the classroom” rather than across the board -- the result of reactions from educators and lawmakers, the officials said.

The restoration of some education funding will include $180 million for a class-size-reduction program and $60 million for a program to assist under-performing schools.

Responding to another point of intense criticism, Davis will recommend restoring $304 million to the state community college system, resulting in a fee increase of $18 per unit rather than the $24 per unit his January cuts would have required. The shift also will give community colleges more money for programs for disabled students and general expenses.

Davis agreed only reluctantly, a senior administration official said, to roll over part of the deficit, accepting the plan as a “consensus position” among Democrats and Republicans. The governor’s proposal calls for the financing for the $10.7 billion in borrowing to be repaid over five or more years, depending on the deal the state can cut with Wall Street bond firms.

Other departures from his January plan include reducing the projected amount of revenue from Indian casinos to $700 million from $1.5 billion, although one official conceded that even that number was a best-case-scenario guess. Davis is attempting to renegotiate with the 61 Native American tribes that have gambling agreements with the state and more than two dozen other tribes seeking agreements.

The revised budget also assumes that the state will not be able to sell $2 billion in tobacco settlement bonds, as originally assumed in January.

Another Davis concession to supporters will be to restore $25 million to the Peace Officers Training Fund, which trains local law enforcement officers.