Gov. Gray Davis scrapped his original plan to deal with the state’s fiscal crisis Wednesday and unveiled a new one that would go easier on the poor and schools but rely on extensive borrowing and steep tax increases to close a budget hole that has grown to $38.2 billion.
The revised budget calls for spreading out the current year’s $10.7-billion deficit over the next five years -- an approach first raised by Republicans -- but having Californians pay it off with a half-cent sales tax increase. Doing so would cost hundreds of millions of dollars in interest but would spare state programs from potentially devastating cuts.
The spending plan represents a major strategy shift for a governor who only months ago vowed he would not sign a budget that failed to substantially reform the state’s tax structure to avoid future deficits. Davis said he would now leave that necessary chore until after this year’s budget is signed.
Without that structural reform, the revised plan closes the budget hole only temporarily: An annual shortfall of $7.9 billion would begin to emerge by July 2004.
Changes in Medi-Cal eligibility requirements that would have cost hundreds of thousands of poor Californians their health coverage are no longer part of the Davis plan -- although other cuts in health care for the poor remain. Significant cutbacks in aid to the elderly and disabled were also discarded.
The governor boosted spending for K-12 education by $403 million over his previous plan, a change that was greeted with enthusiasm by school officials. And Davis proposed giving community colleges a $305-million boost over his January budget, which lowered the $13-per-credit fee increase he had proposed then to $7 now.
While the cuts to the UC and Cal State systems from January remain, Davis spared them from further reductions for which educators had been bracing.
Davis also abandoned plans to raise $2 billion by selling bonds that would have been backed with money owed California from tobacco company legal settlements, because the market for such bonds has become too uncertain.
And he cut in half his projection of revenue that could be gained through renegotiating compacts with tribal casinos from $1.5 billion to $680 million. Many lawmakers are skeptical that the state will be able to get any of that.
Davis said he made some of the budget changes reluctantly. The initial plan he submitted was resisted by both parties; Democrats vowed to block steep cuts in services and Republicans -- who must provide at least a handful of votes for any budget to pass by the required two-thirds majority -- said tax increases were out of the question.
“I proposed a plan [in January] that would balance the budget, erase the entire deficit and entail structural reform,” Davis said. “I tried very hard to sell that budget ... but I could not get enough votes from the Republican and Democratic [legislators]. Republicans don’t come up here to raise taxes and Democrats don’t come up here to cut programs. So, for differing reasons, nobody wanted to get this done in one year.”
Along with the revised budget, the governor released an updated economic forecast that predicts slightly higher unemployment during the rest of this year and in 2004. State forecasters also see slower growth in the personal income of Californians. That growth is crucial because the income tax is the largest source of state revenue.
After rejecting the original Davis plan, lawmakers in both parties began exploring their own proposals that relied on borrowing to spread the pain of cuts over time. Davis picked up on the theme in his revised budget and included a borrowing plan similar to that used to keep New York City solvent in the 1970s.
So far, lawmakers have been able to trim about $6.9 billion from the budget, an amount Finance Director Steve Peace said will likely double when the cuts made this year are factored into next year.
While the revised plan was welcomed by Democrats for restoring $2 billion for education, health care and other government programs, its continued reliance on $8 billion in new taxes sparked immediate Republican criticism. Though many of the tax increases included in the earlier Davis plan have been scaled back, new ones were added.
About half the revenue from new taxes would now come from an increase in the vehicle license fee, which the administration can enact on its own, at a cost to the average driver of an additional $158 a year.
Davis, who faces an effort to recall him from office, earlier resisted the so-called car tax increase, which polls suggest would be highly unpopular with voters. After he threatened to veto a Democratic proposal to raise the fee because it would anger anti-tax Republicans, state lawyers determined that a fee increase could be enacted on administrative order, without a legislative vote. Administration officials say that order will likely be issued soon.
The other taxes Davis would raise all require support from the GOP. They include the half-cent sales tax increase, an income tax hike on high earners, and a new tax on cigarettes.
Finance Director Peace warned that the borrowing in the plan is dependent on the sales tax, and without it the entire revised budget would collapse. Wall Street, Peace said, will not lend California money to pay off the deficit without the new sales tax to back it up.
Republicans were not moved by that argument. Within minutes of Davis’ unveiling of his plan in a Capitol conference room, top Republicans were in the hallway denouncing it.
Assembly Republican Leader Dave Cox of Fair Oaks called the governor’s revised budget a “nonstarter.” Senate Republican Leader Jim Brulte said he was willing to negotiate everything in the plan but the tax increases.
Democrats expressed exasperation with the reaction from across the aisle.
“After everything that we’ve done, after everything that the governor has done, the Republicans have not moved an inch,” said Assembly Speaker Herb Wesson (D-Culver City). “I think now it’s time for us to get real. This isn’t about doing what we want to do. This is about governing, and we have jobs that we have to do.”
“When you hear individuals say ... that we’re willing to negotiate on everything other than taxes, then that’s not a negotiation,” Wesson said. “That’s saying no to negotiations.”
While legislators debated the revised Davis plan, local officials and some interest groups welcomed some aspects of it.
The revised budget, for instance, scales back a proposal to shift several major social service programs from the state to the counties, an idea that had alarmed many county officials.
In the revised budget, the so-called realignment proposal was scaled back from $8.3 billion to $1.7 billion. Programs that would be shifted to the counties under the latest plan include mental health services for children and the homeless, foster care, abuse-prevention services and welfare programs.
Local officials applauded the move.
“Most of these programs are ones that would probably make sense to transfer,” said David Janssen, Los Angeles County’s top administrator. “It’s a much better approach for local government.”
Most of the environmental cuts contained in the original budget remain. The revised plan still eliminates Fish and Game warden jobs, trims regulatory oversight and diverts more than $2 billion from voter-approved water and parks bonds to help pay for conservation programs typically funded from the budget.
Conservationists did, however, praise Davis for reversing his decision to cut funding for the Williamson Act, a $40-million program that gives landowners financial incentives to keep land in farming. The move also appeals to Republicans from the Central Valley, who have called for the program to be preserved.
Wall Street also has taken an active interest in California’s budget debate, with investors urging the state to address the imbalance between taxes and spending. In addition, those same financial institutions have pressed the state’s leaders to cut a deal in time to meet California’s constitutional deadline of enacting a budget by July 1.
That is partly because the state’s cash reserves are shrinking and could run out without a budget. The state must borrow $11 billion in early June to pay off $12.5 billion in earlier loans that are coming due. Additional borrowing is expected this summer or fall, and some bankers are warning that it cannot occur without a spending plan in place.
“I am sending out a clear clarion call that if it doesn’t get done this summer, the state will be facing budget problems in the future,” Davis said. “This is not just something I would like to do. This is something we must do if we want to right the state’s financial ship.”
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Revising the budget
Each year, the governor releases an initial budget plan in January and revises that plan after the April 15 income tax deadline. This year, Gov. Gray Davis is suggesting more than the usual number of changes to his original proposal:
*--* (In billions) January plan May revision Various cuts and savings $20.7 $18.9 Deficit financing to be repaid by sales tax hike $0 $10.7 Shift control of state health programs to local governments $8.3 $1.7 Loans and borrowing $1.8 $2.9 Car tax increase $0 $4.2 Fees on tribal gambling $1.5 $0.7
California’s general fund -- the part of the budget that pays for most state programs and is filled with taxes on income, sales and corporate profits -- was $65.8 billion in 1999-2000. In his January budget, Davis proposed a $62.8-billion general fund. His May proposal calls for $70.4 billion in general fund expenditures.
*--* (In billions) 1999-2000 January 2003 May 2003 Public schools $26.3 $27.4 $29.1 Health & Human Services $17.8 $15.2 $21.1 Higher education $7.9 $8.5 $8.8 Corrections $4.8 $5.7 $5.7
Pegged at $34.6 billion in January, the budget gap has grown to $38.2 billion. Here are the reasons for the change:
*--* (In billions) May changes Health care caseload increases $1.5 Guaranteed school spending increases $0.7 Cancellation of tobacco bond $2.0 Revenue and other fund increases -$0.6 Total change $3.6
Source: Governor’s May Budget Revision
Times staff writers Carl Ingram, Gregg Jones and Nancy Vogel in Sacramento and Miguel Bustillo, Sue Fox, Peter Hong, Lisa Richardson, Carla Rivera, Stuart Silverstein and Rebecca Trounson in Los Angeles contributed to this report.