Election Section

SACRAMENTO – During the past four years, California has screamed along a fiscal rollercoaster – enjoying record surpluses before taking a gut-wrenching plunge deeper into the red than ever before. 

Now, Gov. Gray Davis’ handling of the budget – from his management of the surplus in his first two years in office to his remedy for a $23.6 billion deficit this year – has become a key issue in his race against Republican financier Bill Simon. 

The winner on Nov. 5 will be faced with revenues that continue to sag and fallout from an economic bust that left states nationwide dealing with gaping budget holes. 

Davis took office in January 1999 and inherited a state budget overflowing with tax revenues from a booming economy. He and the Democrat-controlled Legislature – with Republican votes – doled out dollars to a variety of projects and boosted spending for education and the state’s health care program for poor children. 

Davis says he focused on one-time spending and improving state schools. But critics say he simply didn’t prepare enough for future problems and didn’t act quickly enough when those problems materialized. 

Revenues began to dip in 2001, as the national economy sagged and a collapse of Silicon Valley’s tech market severely wounded the state budget. 

Davis – already fighting a crippling energy crisis that weakened his popularity – struggled for the first time in office to win the two-thirds majority vote to approve his budget and signed the spending plan about a month late. Republicans lawmakers held back their votes because they objected to the budget’s quarter-cent sales tax increase and lack of sufficient cuts. 

After signing the 2001-02 budget, however, Davis was forced to call lawmakers into a special January session to cut another $2 billion. 

By this spring, California faced a $23.6 billion budget shortfall – amounting to roughly a fifth of the state’s general fund. 

Davis signed a $98.9 billion budget Sept. 5 – a record 67 days late – that used a combination of cuts, borrowing and increases to the state’s revenues, including the suspension of a tax break that allows businesses to write off losses, to fill the gap. 

But many, including the state’s nonpartisan legislative analyst, say California still could be strapped with multibillion-dollar deficits in the next half-decade. Davis already this year has asked state departments to prepare to cut another 20 percent next year. 

And, budget analysts say, Davis has exhausted the most politically palatable options and may be forced to call for massive cuts and tax increases in the coming year. 

“The budget itself relied heavily on one-time or limited term solutions,” said Brad Williams, senior economist for the Legislative Analysts’ Office. “While the solutions to this year’s budget did address the immediate shortfall, it didn’t add to a large degree the larger gap that we see.” 

Recent statewide polls show voters are displeased with Davis’ handling of the budget but, according to a Los Angeles Times poll released Tuesday, likely voters who gave Davis low marks on handling the state budget and the energy crisis felt he would still do a better job in those areas than Simon. 

Davis defends his handling of the budget. “We are at the mercy of major fluctuations in the stock markets,” he said. He also said he vetoed $7.5 billion in spending proposals in budgets sent to him by the Legislature on the past four years. 

The primary cause of the state’s budget shortfall, according to the Legislative Analyst’s Office, was a steep decline in revenues, largely from capital gains and taxes from stock options. The governor said he supported the creation of a commission to review possible remedies to the state budget’s ties to the fluctuating stock market. 

Options that have been recommended include: Lessening the state’s dependence on the stock market by lowering the capital gains tax and drawing more money from sales taxes and taxes on the property owned by businesses. 

Davis also points to the creation of 900,000 new jobs under his watch in California. 

“The economy is fundamentally sound and I think it will continue to be so,” Davis said in a written answer to an Associated Press questionnaire about various issues. 

Simon, for his part, has continued to criticize Davis’ handling of the budget. But he has provided few concrete details about what he would do. 

“The fact is this budget is not worth the paper it’s printed on. The budget is a fabrication. It’s neither balanced nor fiscally responsible,” Simon said after Davis signed the 2002-03 budget. Simon said the Davis budget relies too heavily on loans, fund shifts and transfers. 

But, Simon said, he would have signed the budget, too, if he had been in Davis’ position. 

Simon has said he opposes taxes and that future deficits should be addressed by reducing spending. 

During the primary campaign, he released a plan to close what was then estimated as a $12.5 billion deficit that included a 15 percent cut in state spending, a hiring freeze, elimination of new programs and cut in the capital gains tax from 9.3 percent to 5 percent. 

At the same time, however, Simon proposed a major program to build new highways and improve state infrastructure using some private firms. But he didn’t specify how to pay for it. 

Also, while criticizing Davis for not closing the $23.6 billion deficit, Simon did not release his own budget plan during the general election campaign. He said that was Davis’ job. 

Democratic Gov. Gray Davis and Republican challenger Bill Simon will face each other at the polls Nov. 5. Here is a look at their accomplishments and proposals on the budget and economy: 

Davis: 

• Signed a budget two months late that included $9 billion in spending cuts to help fill a record $23.6 billion budget deficit this fiscal year. Davis had said he did not anticipate any tax or fee increases but the budget raises about $2.4 billion in new money, which supporters called “revenue enhancements.”. 

• Says he invested heavily in education, transportation, health care and public safety during his first two years in office when the state was flush with cash from the economic boom. Attempted to focus on one-time investments to prevent strapping the state with ongoing obligations. 

Simon: 

• Criticizes the budget Davis signed as “neither balanced nor fiscally responsible,” contending it relies too heavily on loans, fund shifts and transfers. However he says that in Davis’ position he, too, would have signed the budget. 

• Released a plan during the primary to close a budget gap then estimated at $12.5 billion by cutting state spending 15 percent, instituting a hiring freeze, eliminating new programs and reducing the capital gains tax from 9.3 to 5 percent. 

• Did not release a budget plan during the general election to address the deficit, contending that was Davis’ job. 

• Opposes taxes and says future deficits will have to be addressed by reducing spending.