Blood and Cuts

California is knee-deep in its worst-ever budget crisis. Governor Gray Davis is proposing more than $10 billion in first-round cuts and adjustments -- growing to nearly $30 billion over 18 months. He‘s hauled in the Legislature for a brief, unprecedented special session to sort through the mess. The smoke and mirrors used to paper over the crisis through the election are pretty much exhausted.

”It’s just a horrendous situation,“ says Jean Ross, head of the left-leaning California Budget Project. ”This is an even bigger crisis than during the recession a decade ago,“ declares Larry McCarthy, head of the conservative California Taxpayers Association. ”It places a dark cloud over everything in California,“ notes state Senator Sheila Kuehl (D--Los Angeles), a leading candidate to replace Senate President pro tem John Burton of San Francisco when term limits force him to step down next year.

Protests are inevitable once proposed massive cuts in education, health care, welfare and transportation sink in. For now, the mood in the Capitol is largely one of confusion and shellshock. Davis doesn‘t have legislative authors yet for his budget proposals. Republicans oppose taxes, and some talk of deficit spending, prohibited by the state constitution. Democrats want more taxes and talk of a ballot initiative to get them if a few Republicans can’t be brought over to reach the two-thirds needed to pass them in the Legislature.

L.A.‘s representatives are scrambling to come up with a plan to protect their constituents, a situation aggravated by the fact that Assembly Speaker Herb Wesson (D--Los Angeles) was missing in action last week. He’d gone on a Hawaiian jaunt with other legislative leaders, a junket sponsored by the prison guards union (whose rich new state contract added a $500 million annual expense to the budget). Other key L.A. legislators, Davis administration officials, and budget experts remained in the state. What was striking was how little they communicated, and how daunted most seemed by the crisis.

Back from Maui, a chastened Speaker Wesson set up a series of budget hearings around the state for next week -- health and human services in L.A., the environment in San Diego, local government and state operations in Sacramento, education in San Francisco, and information technology and transportation in Oakland. As an Angeleno from South L.A., he agrees with L.A. Senators Debra Bowen, Gil Cedillo and Kuehl that protecting L.A. County‘s reeling health care system must be a top priority, and notes that L.A. has a disproportionate number of poor people whose other services must be protected as well. ”I came here to save lives, not kill people,“ Wesson says.

Westsider Kuehl argues that taxes must be increased. ”It’s the responsibility of everyone in the community to take care of the community,“ says Kuehl. ”We need to preserve the infrastructure of health, welfare and education programs as we cut those programs. Cut but not close down, so there‘s something left when the money comes back,“ she says. Meanwhile, she thinks a variety of tax increases will be necessary. ”My Senate district is the highest income in the state,“ she says. Many of her entertainment industry constituents, she says, have offered to write an open letter calling for an increase in income taxes for the state’s most affluent citizens.

Cedillo, an Assembly vet and former Service Employees leader, has a somewhat different position. He represents a low-income district and feels that not only should taxes be raised but that no services should be cut. ”I‘m just back from El Salvador, where they make do on remittances from immigrants and coffee,“ says the Eastsider. ”The streets are paved with gold in California! We don’t need to make choices between teachers and prison guards; we need to raise revenues.“

Bowen, one of the most experienced legislators in the term-limits era (33 of 80 Assembly members are new; six of 40 state senators), also worries that budget cutting could hurt the effectiveness of environmental regulation.

At the other end of the spectrum, the California Taxpayers Association (CalTax), representing much of corporate California, argues that there should be no tax increases. ”We need to grow the economy,“ says CalTax president Larry McCarthy. ”That‘s how we get more revenue.“ CalTax will release a report on fraud and waste in the state budget, which it says accounts for $7 billion, including some striking examples like the lucrative prison-guards contract and FBI estimates of MediCal fraud.

So whose fault is all this? The previous version of the state budget was ”balanced“ by contriving $4.3 billion in loans, transfers and fund shifts -- including the state’s future settlement from tobacco companies -- and by assuming that the Bush administration would give the state $1.1 billion to pay for low-income health care, the incarceration of illegal immigrants and the cost of anti-terror programs. Most of the federal money never materialized.

In an arguably ideal world, rich and powerful corporations and individuals would gladly pay through the nose to keep the communities of California, from which their wealth springs, healthy and safe and well-educated. In the real world, the corporate tax, according to the California Budget Project, generates only $7.3 billion, far less than the other two big sources of revenue for the state‘s battered general fund, the personal income tax ($37.6 billion in the current fiscal year) and the sales tax ($23 billion). Our leaders, who know how the system works, screwed up and spent far more money than the state is taking in.

California benefited mightily from the booms in high-tech equipment, the once-fabled dot-coms and the stock market. All three have collapsed like shouted-at souffles, with al Qaeda doing more than its share of the shouting. The most affluent top 10 percent in this state -- making $100,000 and up -- provide a whopping 80 percent of California’s income-tax revenues. With computer markets saturated, the dot-coms evaporated, initial public offerings and stock options disappearing, and the stock market limping, those earners have not been earning enough to keep California‘s budget perking along at the increased levels of spending of the Davis era.

Should Davis and the Democrats who run the Legislature have realized that booms don’t last and put the surpluses of just a few years ago aside for today‘s rainy day? Of course. But Davis remembers the last time that state leaders started socking away a big surplus. He was Jerry Brown’s chief of staff at the time, and the result was Proposition 13, the massive property-tax cut that benefited corporate California as much as homeowners. More recently, George Deukmejian returned a more modest surplus to the public rather than invest it in public services or public works, and we all enjoyed the extra hundred bucks. The natural inclination in this culture is to look at a big pot of money and figure out how to spend it, whether it‘s on schools or just ourselves.

So what are the solutions beyond cuts? The most common proposals for raising revenue are reinstating the top bracket of the income tax -- cut by Pete Wilson, which according to the California Budget Project would raise $3.1 billion -- and restoring the full vehicle license fee (also cut by Wilson), which would raise $3.9 billion.

A new 50-cents-a-pack cigarette tax backed by Davis during an earlier round of negotiations on the current budget would raise a few billion more. A sales tax on services is also talked about. But the real money looks to be in corporate taxes, which as you see yield far less money than most suppose. This would raise an enormous howl from the business community, which would point out, not without merit, that it is hard pressed in a tough economy. And the Republicans -- who offered no budget plans of their own during the campaign -- have vowed so far to oppose all revenue increases in a Legislature in which nearly all increases, except the vehicle license fee, require some of their votes to reach a needed two-thirds.

In a further sign of the seriousness of the crisis, the Burton and Davis camps are eschewing their frequent sniping, with the fiery liberal Burton declining to blast the more conservative Davis for his proposed cuts in programs for the ill, the elderly and children, and Davis press secretary Steve Maviglio praising Burton for committing to a schedule that ”will get the job done next month.“

In a conference call last week, Davis, pressed by the Weekly to say when he thought the state would resume its customary growth, promised to have an answer by January. UCLA forecasters are talking about 2004 for economic recovery, the state’s legislative analyst says late 2003, but no one really knows yet, especially given the uncertainty caused by the prospective invasion of Iraq.


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