Bitter, but a New Start

The revised budget Gov. Gray Davis presented to the Legislature on Wednesday is a distasteful brew of tax increases, deep program cuts and odious debt rollover. With the state backed into a corner by banks and investors, it may also be California’s last chance.

Davis’ original budget in January was better because it bit the bullet and closed the budget gap -- then an estimated $35 billion and now up to $38.2 billion -- this year. Davis now says it had no chance because of opposition to cuts by liberal Democrats and adamant refusal to raise taxes by Republicans in the Legislature. This is true, but it is also indicative of a failure of leadership all around -- by Davis and by legislative leaders of both parties, who listened far too intently to special-interest pleadings rather than focusing on the long-term welfare of the state.

Yes, the governor has to find compromises. But in his latest version of the budget, Davis’ compromises lean too much toward interest groups, preserving, for example, $180 million for classroom-size reduction at the behest of the California Teachers Assn. and declining to come to grips with huge raises for prison guards. As long as this sort of spending for nonvital services remains, there’s still work to be done on the budget.

Davis now has adopted a GOP plan to finance this fiscal year’s deficit, projected to be $10.7 billion on June 30, by issuing bonds to be paid off over five or more years with revenue from a sales tax increase of half a cent on the dollar. Republicans wanted to retire the bonds with existing sales tax income, but borrowing so much without increasing taxes, on top of other new debt, would put the state’s total indebtedness into investors’ danger zone.

The big banks and Wall Street say if a specific source of revenue is earmarked for paying off the bonds, California’s crucial ability to borrow will survive. In fact, Stephen Levy, director and senior economist of the Center for Continuing Study of the California Economy, says the multiyear payoff of the shortfall helps the economy by maintaining stability in critical state programs. Republicans who are already screaming that this is another “tax and spend” budget had better snap to reality.

If Davis’ proposed cuts were achieved, general fund spending would drop from $78 billion this year to $70.4 billion in the next, the biggest dollar-amount decline in half a century. In the longer term, Davis and the Legislature should come up with a credible plan to keep the state from spending beyond its means in the future, and to keep it off the current revenue roller coaster. That may mean a new constitutional amendment to clamp some sort of limit on spending and to reserve capital gains taxes for one-time uses, such as roads and water projects.

The Legislature’s one critical necessity this year is to pass a budget on time, by midnight June 30, to avert a cash crisis. That means the political posturing must end. There’s no doubt that California will be stuck with an awful burden of new taxes, less spending and debt. The governor has put a plan on the table that needs work but is more realistic than anything the Legislature has come up with so far.