New Calif. Budget Tailored to Politics

The revised $96 billion spending plan for the 2003-04 fiscal year uses a half-cent increase in the sales tax to back planned borrowing that will allow Davis to avoid both the major tax hikes that Republicans abhor and deep cuts in social programs that Democrats steadfastly refuse to support.

"I learned a long time ago that part of leadership is listening," said Davis, who is saddled with drooping approval ratings and a Legislature that is sharply divided along partisan lines. "I've tried to put together a plan that takes the best ideas from the meetings I've had and I believe this plan will result in a responsible and timely budget."

Earlier this year, Davis proposed a spending plan based on a $35 billion deficit over 18 months. It included a sharp increase in the state's vehicle-licensing fee and would shuffle more than $8 billion in state programs over to municipal governments that were just as strapped for cash as the state. In addition, about $20 billion in spending cuts were proposed.

Davis told reporters Wednesday that while he still preferred to address the deficit as promptly as possible, the Legislature had other ideas about a proposal that was too painful for either party to digest.

"That was my preferred plan and still is," he said.

"Unfortunately, both parties of the Legislature decided they did not like the one-year plan I proposed. They have made a lot of substantial progress in adopting some of the reductions I proposed, but they resisted, for different reasons, solving this problem in one year."

The new proposal shifts less than $2 billion to the cities and will provide funding to local governments from higher taxes on cigarettes and upper-income residents. The VLF increase, which is a separate law already on the books, will be triggered, raising the cost of registering a car in California by an average of $130.

California's sales tax of 7.25 percent, already one of the highest in the nation, would be bumped up to 7.75 percent in addition to local taxes that already have the total sales tax above 8 percent in most of the state.

Davis -- whose immaculate appearance belies his hard-nosed political savvy -- gave the Legislature what it wanted, along with the caveat that the budget must be passed promptly and the tax system must be overhauled to avoid a recurrence of the steep revenue decline that's considered the culprit in the current crisis.

For the Republicans, Davis cut general fund spending by $7.6 billion, which he and his staff figured was the largest single-year spending cut since World War II. He also called for a half-cent boost in the sales tax that would be used solely to pay off bonds that would be sold to cover the current deficit and then would automatically end once the books were balanced in about five years.

For his fellow Democrats, Davis added another $700,000 to education spending while pledging to protect environmental programs and health insurance for underprivileged children.

In return, Davis wants the Legislature to pass the budget -- not merely vote on it -- as quickly as possible so that the sales-tax increase will be in place by the time the bond proposal is taken to Wall Street.

While initial Republican comment from Sacramento Wednesday consisted mainly of reiterations of opposition to tax hikes, Davis' finance director, Steve Peace, said it would do little good to offer bonds unless the budget and the revenue safeguards contained therein were passed.

"The money goes into a special-fund box where it will never touch the general fund, and the Legislature has no ability to take that money and use it for any purposes other than to retire the debt," Peace said.

"Put yourself in the financial community's perspective and you can see why nobody in their right mind would lend money to this state if it wasn't a new tax that had no participation in the general fund," he explained. "You would run the risk as a lender of a future Legislature saying, 'well, times are tough so let's take money out of that special fund and use it for general-fund purposes.'"

Davis called on the Legislature to pass the new budget before the fiscal year ends on June 30. After that date, California faces the prospect of bringing spending to a screeching halt sometime during the summer.

"The controller has estimated that the raw financing will provide cash sufficient to last 30 to 60 days," Peace said.

When asked what the next step would be for California, Peace admitted he was unsure.

"I don't know," he shrugged. "No one has ever been there before."