Budget Crunch Leaves Davis Vulnerable in Election Year

by Howard Fine

It's an incumbent gubernatorial candidate's nightmare: a budget deficit so huge there's no escape from either cutting services, raising taxes or both and there's an election less than six months away.

That's the situation Gov. Gray Davis now faces as his administration prepares to release the May revision to the $101 billion state budget he first introduced in January. Back then, he pegged the deficit at $12 billion. But thanks to plunging income tax revenues, budget watchers in Sacramento estimate that the budget deficit will be between $20 billion and $22 billion, or more than 20 percent of the total budget and more than 25 percent of the $78 billion general fund.

In short, it's an ugly picture that leaves Davis and state legislators in an election year pinch.

"This is going to be even rougher for Davis than the energy crisis last summer," said local political consultant Allan Hoffenblum. "Right up to Election Day, it's really going to demonstrate his leadership abilities."

So far, though, Davis' election opponent, Republican nominee Bill Simon, has not been able to score points on the budget issue. Instead, Davis has kept Simon on the defensive, criticizing him, as an example, for not releasing his personal income tax information.

As a result, Simon has been losing ground. Last week, a Field Poll showed Davis holding a 14-point lead over Simon, a sharp turnaround from the last Field Poll in February that had Simon with a 2-point lead over Davis.

Looking to shore up the Republican outlook this fall, President Bush made a rare visit to California last week and raised $1.8 million for the GOP candidate. Bush told 1,400 Republicans at a Santa Clara fundraiser that he was proud to support "this new face in American politics" a somewhat awkward position given that Bush had been pushing Richard Riordan in the primary.

Despite these and other setbacks, Simon will have plenty of opportunities to go after Davis as the budget process moves forward especially if a stalemate develops and the state goes weeks or months without a budget.

To head off such attacks, Davis will continue to shift public attention to other matters.

In his May revision, Davis may be tempted to downplay the size of the budget deficit or emphasize its temporary nature. "He will try to paint as rosy a picture as possible," said Sherry Bebitch Jeffe, senior scholar at the school of policy, planning and development at the University of Southern California.

He will likely introduce an array of measures to borrow or shift funds around, such as monetizing tobacco settlement funds, leaving a smaller stated budget deficit.

But those measures can only go so far. In the end, service cuts and revenue increases will be necessary. "There's no getting around it: he's going to have to cut some programs, even those that help traditional Democratic constituencies," Jeffe said.

Indeed, Davis has signaled that he may not be able to meet state constitutional requirements for education funding. That could prove politically damaging, considering the Field Poll released last week showing that voters rank education and schools as the single-most important issue in the November election.

Other cuts are likely to target those Californians who don't traditionally go to the polls, such as health care services for the poor or recent immigrants.

But the gap is so huge that unless Davis slashes entire departments, cutting services won't by itself balance the budget. He's going to have to tackle the revenue side as well and that might mean taxes.

"Note Davis' language earlier this year when he said he wouldn't advocate for new taxes," Jeffe said. "That's not the same as 'No new taxes.' If a tax increase measure is put on his desk, he hasn't said he won't sign it."

Davis may support a wide array of fee increases as well as a tax increase on the top 1 percent or 2 percent of income earners.

"If he's going to have to raise taxes, then targeting the tiny percentage of top income earners is the way to go," Hoffenblum said.

In his attempt to solve the budget crisis, Davis will likely face a divided Legislature. Many Democrats, including Senate President John Burton, D-San Francisco, back tax increases. Republicans tend to favor spending cuts. And, despite their minority status, Republicans could hold the key to the budget crisis, since at least five Republican votes will be needed to secure the two-thirds vote necessary in each house for budget passage.

Staff reporter Howard Fine can be reached by phone at (323) 549-5225, ext. 227, or by e-mail at hfine@labusinessjournal.com.

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