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CALIFORNIA'S BUDGET CRISIS

Davis Submits His Revised Budget Plan

The governor's proposal would spare most state programs, including education, from devastating cuts. But it relies on borrowing and stiff tax hikes.

May 15, 2003|Evan Halper and Jeffrey L. Rabin | Times Staff Writers

SACRAMENTO — 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.

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