Politicking Underway As State Prepares for Next Phase of Cutting

Staff Reporter

Gov. Gray Davis may have signed into law $3.3 billion in budget cuts earlier this month, but if anything, the state's budget crisis has become more acute since then.

Next year's budget deficit has grown even larger than originally projected, the time to deal with it has grown shorter, and now, with the prospect of prolonged war, projections for significant revenue boosts seem more distant than ever.

To top it off, Democrats and Republicans appear as divided as ever over how to tackle the problem, with Democrats leaning toward tax increases and Republicans adamantly opposed to them.

"No question the budget problem has gotten worse in the last few weeks, not better," said Megan Taylor, a spokeswoman for the California League of Cities.

What's more, as hearings for the 2003-04 budget kicked off last week, intense lobbying from interest groups concerned about their programs getting cut has brought into play a new level of political pressure beyond the usual philosophical divide between Democrats and Republicans.

These pressures were in part responsible for the first round of cuts being smaller than planned.

Last December, Davis proposed $10 billion in cuts for the current fiscal year, which was whittled down in the Legislature to the $3.3 billion signed earlier this month. As a result, $6.5 billion has now been shifted to the next fiscal year, making the 2003-04 budget deficit that much worse.

"Before, you had a roughly $30 billion problem to solve in 18 months; now it's something like $27 billion or $28 billion in 12 months," said Ted Gibson, former chief economist with the state Department of Finance and now a private Sacramento-based consultant.

Recovery plan

There are some hopeful signs. The broad outlines of a budget solution have been apparent for months: $8 billion to $10 billion in cuts, another $8 billion to $10 billion in tax and fee increases, and up to $10 billion in short and long-term borrowing.

"That's certainly been the starting point for discussions," said Dan Pellissier, chief of staff to Assemblyman Keith Richman, R-Northridge.

In recent weeks, a bipartisan proposal to roll over some of the deficit using bonds seems to be gaining momentum. This is due to a realization that closing such a huge budget gap just with tax increases or spending cuts would deliver too large a jolt to the fragile economy.

The main proposal calls for the bonds to be repaid over time with revenues from the general fund, although there has been some talk, especially in Democratic circles, of a sales tax hike to repay the bonds.

Consideration of specific budget cuts or tax and fee increases has largely been put on hold until the details of this proposal are worked out. "Once you have how much is going to be rolled over, then you know how much is left to do in spending cuts and tax increases," said one legislative staff member. "Right now, it's all just guesswork."

Also, legislators are waiting for Davis to release his May revision to the budget, which typically occurs on or about May 15. This year, there's uncertainty over how much the war with Iraq and with it, preparations for possible terrorist reprisals will affect state revenues.

"This is where the most pronounced impact of the war will occur," said Fred Main, senior vice president of the California Chamber of Commerce. "It's been holding the recovery down, which had been anticipated to bring more revenue into the state by now."

Sales tax revenues and personal income tax revenues will likely be hardest hit, Main said.

The war has also prompted increased state spending for homeland security. Last week, Davis deployed the National Guard at Los Angeles International Airport (at a cost of $14,000 per day). And for weeks, California Highway Patrol officers have been racking up $500,000 per week on overtime costs.

Homeland costs

But these expenditures are modest compared with a $30 billion budget deficit. For all of last year, homeland security expenditures were $500 million, according to Davis spokesman Steve Maviglio. A similar level of expenditures is expected for the 2003-04 fiscal year, but state officials are counting on a significant portion of that being reimbursed by federal funds. So far, though, California is only slated to get between $50 million and $100 million in the initial round of federal homeland security dollars.

The bigger impact of homeland security spending is likely to be felt at the local level, where the brunt of first responder costs are borne.

But there may be some good news in the state budget for local governments. There is growing sentiment for an increase in the vehicle license fee, which would bring $3 billion to $4 billion into state coffers. Those additional dollars would allow the state to continue "backfilling" an equivalent amount to local governments from the general fund, thus avoiding deep cuts in local programs.

"Based on what we saw with the most recent round of cuts, we think the odds have increased now that VLF funding for cities and counties will be preserved," said Dwight Stenbakken, a lobbyist for the California League of Cities.

Another bright spot may be gas tax revenues for both the state and local governments that have come in much higher than expected because of the run-up in gas prices.

But like spending on homeland security, the amounts here are relatively small, in the range of a couple hundred million dollars statewide, hardly enough to make a significant contribution to the budget solution.

The most vulnerable local government program at this stage is redevelopment funding. Davis has proposed diverting $500 million in local redevelopment funds to Sacramento next year and hundreds of millions of dollars on a continuing basis thereafter. While Republicans have opposed this, the opposition has not been as strong or unified as on other points.

"Redevelopment is not at all politically popular up here, thanks to the many stories of redevelopment abuse making their rounds," Gibson said. "I would look for the Governor's proposal to go through."

Education, which already absorbed more than half of the first round of $3.3 billion in cuts, is likely going to take another hit next year, as will health and social service programs, Gibson said. "That's where the money is, so that's ultimately where a large part of the cuts are going to have to come from."

Transportation programs will also be in line for further cuts, Main said, possibly made easier by the perception that increased gas tax dollars will flow back into road projects. Most of the additional gas tax revenues, though, are from the sales tax on gasoline, which go directly into the state's general fund.

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