State Needs Fast Billions to Deal With Budget Crisis
By Gregg Jones
Times Staff Writer

November 2 2002

SACRAMENTO -- For all the stump speeches about better schools and safer streets, for all the mudslinging over campaign contributions and offshore tax shelters, California's next governor will wake up Wednesday facing one overwhelming issue.

The winner of Tuesday's election will have barely two months to propose at least $10 billion in budget cuts, tax increases and other "revenue enhancements" -- and possibly as much as $20 billion, an amount equivalent to one-fifth of the $98.9-billion state budget for the current fiscal year, government and private experts predict.

Every Californian could take a hit, from the richest to the poorest, college students to senior citizens, automobile owners to corporate executives.

"I really don't know how they're going to deal with it," said Ted Gibson, the former chief economist of California, who foresees a $20-billion budget hole for 2003-04 and no easy solution in sight. "To solve it all at once would require both massive tax increases and massive spending cuts that I don't think the system is prepared to handle."

Actually, the next governor could solve the problem in one fell swoop when he proposes a new budget in January -- if he is willing to, say, sell off the state parks system or close some state universities.

"You'd have to do many steps of that radical magnitude," said Jean Ross, executive director of the California Budget Project, an independent budget research group in Sacramento. "Otherwise, I don't think it can be done and maintain a quality of life and level of services that voters find acceptable."

Democratic Gov. Gray Davis -- a steady leader in the polls -- won't say how he would balance the next budget. Republican challenger Bill Simon Jr. blames Davis for the crisis and vows that he wouldn't raise taxes, but he won't say what programs he would cut.

State Finance Director Tim Gage has already asked state agencies and departments to submit 2003-04 spending plans that reflect 20% cuts.

But the problem is so huge that even some Republicans say new taxes or higher fees are unavoidable in the short term.

"It involves a lot of cuts in programs," said state Sen. Bruce McPherson (R-Santa Cruz), the Republican candidate for lieutenant governor. "Realistically, to get out of this in any short time, there will also have to be some of what we call 'revenue enhancements,' which is troublesome, because we're already a high-tax state."

Assembly Republican leader Dave Cox, who led a GOP rebellion in this year's budget battle, is already drawing a line for the coming debate. Cox says Republican legislators won't support new taxes or other revenue increases.

Davis took office in January 1999, when the economy was booming, stock prices were soaring and the state treasury was overflowing with an $8-billion surplus. With the enthusiastic support of the Democrat-controlled Legislature and the acquiescence of Republicans, Davis increased spending by 36% over the next three years.

But the stock market started sliding and economic growth began slowing in 2000. California's difficulties were compounded by a costly energy crisis the following year. State income tax receipts and other revenues plummeted.

The crisis exploded into public view this year with a shortfall that had reached $23.6 billion by the time the Legislature finally passed the 2002-03 budget at the end of August. Davis signed the 1,000-page document Sept. 5, a record 67 days late.

On paper at least, Davis achieved his fundamental goals: He balanced the budget while preserving funding for education and other major programs and avoiding a general tax increase in an election year.

But he did it by patching together a crazy quilt of cuts, tax increases, loans, transfers and fund shifts that still have Republicans screaming foul and financial experts shaking their heads.

Many of the solutions were one-time maneuvers conceived by the best minds of the state Finance Department, such as siphoning off $4.5 billion in tobacco settlement money, which was sold to Wall Street investors in the form of "tobacco bonds."

The move helped address the immediate crisis, but it creates long-term budget difficulties by depriving the state of $500 million in annual tobacco payments for at least 23 years.

In the looming battle, the governor's options will be limited by a labyrinth of voter-approved initiatives such as Proposition 98 for education funding, federal mandates and constitutional requirements: money that goes to schools, health care, courts, prisons, public employee pensions and state government operations. These functions take roughly two-thirds of general fund spending off the table.

Propositions on Tuesday's ballot could put even more money off limits.

"We've gone agency by agency and department by department and asked: What can you cut?" said Susan Kennedy, Davis' Cabinet secretary. "If you cut staff at the [Department of Motor Vehicles], people wait longer for licenses. If you cut staff for audits and investigations, violations increase in nursing homes, foster care and rehab centers. You can't just cut a department's budget and not eliminate program operations."

Likely targets can be gleaned from this year's budget debate, possible cuts identified by the state's legislative analyst office and budget experts.

In no particular order, prisons, universities and local governments are likely to see cuts, said Gibson, the former chief state economist.

But the biggest potential cuts, politicians and experts say, could be considered in Medi-Cal, the state and federally funded health-care program for millions of low-income, elderly and disabled Californians. It's the biggest chunk of the state budget, after education.

For example, California could save as much as $250 million over two years by suspending optional Medi-Cal services such as acupuncture, dental cleanings and chiropractic and psychological services, the analyst's office said last summer.

Davis, in fact, initially proposed cutting all Medi-Cal dental benefits for adults this year. But the Senate and Assembly budget committees rejected the proposal, illustrating a central fact about the coming budget battle: Virtually any cuts recommended by the next governor will face fierce resistance from legislators and special interests.

"Nobody is going to agree on how to approach this, much less solve it," Kennedy said. "Every dollar in the budget has a cult following behind it."

The governor also will have to consider the effects of any health-care cuts on local governments, because patients stripped of Medi-Cal coverage will wind up seeking treatment for more serious problems in hospital emergency rooms around the state, experts warn.

Los Angeles County, in fact, is already being forced to close medical facilities and cut services because of a crippling budget crisis. Cutting state health-care benefits will only intensify such problems, state officials and independent experts warn.

Teachers also could feel the pinch. This year, Davis suspended a tax credit for them because of budget pressures, and some experts expect that to happen again next year.

If Davis wins reelection, aides expect him to continue to make education, public safety, children's health coverage and seniors his spending priorities. That could help shield the Healthy Families program for uninsured children not covered by Medi-Cal and Cal Grant college scholarships -- both expanded by Davis over the last four years.

On the revenue side of the equation, higher vehicle license fees and an income-tax increase for the wealthiest Californians will get a long look, experts say. Restoring the vehicle fees to 1998 levels could raise about $3.8 billion. Increasing the highest individual tax brackets could bring in roughly $2.7 billion, proponents say.

"You need something large enough to raise substantial amounts of revenue, and those are the big-ticket revenue options," said Ross, whose group is an advocate for poorer Californians.

College students are likely to face a hike in tuition fees. Earlier this year, the legislative analyst estimated that a 10% increase in University of California and California State University resident fees would raise $43.6 million.

Davis reduced state park entrance fees during his first term, but reinstating higher fees could raise as much as $20 million, the analyst office said last summer.

Simon's proposal for solving this year's budget crisis included a 15% cut in state operations, a hiring freeze and cutting what he described as "pork projects" and "padded budgets." He also advocates cutting taxes, which he says would spur economic growth and enable the state to "grow" its way out of the crisis.

The conservative California Taxpayers' Assn. says tax increases shouldn't even be contemplated. The group says the state government could save $6 billion just by eliminating fraud, waste and mismanagement -- an estimate that other experts say is too optimistic.

"We got here by out-of-control spending," said Larry McCarthy, the group's president. "The biggest revenue opportunity the state of California has is an improving economy, and the very last thing they should be thinking about doing is slowing that recovery by raising taxes."

Whatever choices are made by the next governor, finding $10 billion to fill next year's expected budget hole promises to be painful.

Anything more -- and most indications are that the shortfall will be much larger -- will require a multiyear solution, experts say.