JEFFREY KAYE: Public employees protesting cutbacks have become a common sight in California politics. Teachers in Anaheim recently rallied against an increase in health care premiums.
SPOKESPERSON: Please show us that you really do care about women and children and the future of education in Anaheim City School District. (Applause)
JEFFREY KAYE: Teachers unions' generous contributions helped put Gray Davis in the governor's office in 1999.
GOV. GRAY DAVIS: The time has come to restore California's public schools to greatness. ( Applause )
JEFFREY KAYE: In its first years, the Davis administration presided over hefty spending hikes, particularly in education. There were also increases in health care, prisons, and public employee pensions. Drivers got a reduction in car taxes.
SPOKESPERSON: If you go back to the 1989, '90 fiscal year...
JEFFREY KAYE: Jean Ross of the California budget project says the spending increases made up for budget reductions of the early 1990s.
JEAN ROSS: California was in the bottom tier of the states, typically 40th to 45th in terms of what we spend on a per-pupil basis. That increase in school spending during the late 1990s brought us up to about 29th. We're still below average.
JEFFREY KAYE: The good fortunes of the late '90s were made possible in large part by high- tech. California's thriving dot-com business sector fueled an economic boom that produced a bonanza in tax revenues. Economist Esmael Adibi directs the Center for Economic Research at Chapman University in Orange County.
ESMAEL ADIBI, Economist: The state budgeting from '98, '99, and 2000 was growing very rapidly-- the revenue side-- helped by income taxes on individual side, exercise of options, because the stock market was doing well.
JEFFREY KAYE: But that was before the recession. This year, even though education still consumes 52 percent of the state budget, school districts around California are struggling with cutbacks.
SPOKESPERSON: Ah, there's the bell.
JEFFREY KAYE: In Anaheim, a rising tide of red ink has led to layoffs and a pay freeze. And now, the district wants teachers to foot the bill for increased medical premiums.
SUZI BROWN, Anaheim School District: We can't afford it. We know that next year will be worse than this year. We know we'll have to cut as much. We're anticipating even 50 percent more. And the year following, we still don't know.
JEFFREY KAYE: Government programs and employees have been cut back throughout the state. Health care services have been reduced. State universities and colleges have limited enrollment and raised fees. To help close this fiscal year's $38 billion deficit, elected officials tripled the tax on cars and borrowed billions of dollars. But California still spends more money than it takes in. Taxpayers face a projected budget deficit of at least $8 billion for the next fiscal year, which begins in July. In California, tax hikes on property are limited by Proposition 13, so the fortunes of state and local treasuries fluctuate with the business climate. When the high-tech bubble burst at the turn of the century, tax revenues also took a nosedive.
JOHN MEEHAN: I don't think we've paid any taxes in the past two years.
JEFFREY KAYE: John Meehan is CEO of Southland Micro Systems, an Orange County company that makes computer memory modules.
JOHN MEEHAN, CEO, Southland Micro Systems: We used to pay a tremendous amount of taxes, but, you know, not making profits doesn't benefit to the tax situation. We need to make profits in order to pay taxes.
JEFFREY KAYE: Revenues for Meehan's company, which he runs with his brother, Joe, have dropped by 50 percent since 2000. The business once employed 260 people; now there are 100. The sales floor is practically abandoned. But the high-tech downturn is only one of the Meehans' business woes. Their firm, like others, is also grappling with higher costs-- of energy, workers compensation, and health insurance. But unlike others, Meehan says he's staying in California.
JOHN MEEHAN: We've seen a tremendous amount of our major customers and the manufacturing go to overseas.
JEFFREY KAYE: To where?
JOHN MEEHAN: Mostly to China and Southeast Asia.
JEFFREY KAYE: Since December 2000, California has lost more than 300,000 manufacturing jobs.
SPOKESMAN: It's a winning strategy.
JEFFREY KAYE: How to fix a state that's broke and an economy that's broken is the backdrop to the attempt to recall Gray Davis from office.
ESMAEL ADIBI: Anybody who goes there is going to have a difficult time.
JEFFREY KAYE: Economist Adibi says any governor will face the same basic question.
ESMAEL ADIBI: The problem would be: Should I increase my revenue; should I cut spending; should I do both? This is the fundamental question facing... it doesn't matter who is going to be the governor.
JEFFREY KAYE: While Adibi defines spending as the main trouble, Ross, a more liberal economist, disagrees.
JEAN ROSS: I don't think the evidence shows that we have out-of- control spending. I think we had an unprecedented drop in state revenue collections.
JEFFREY KAYE: The clashing economic analyses are reflected in the politics of the recall battle. Lieutenant Governor Cruz Bustamante calls his economic program "Tough Love." The Democratic frontrunner in the recall race advocates reductions of car and college fees, along with higher taxes on tobacco, alcohol, and commercial property.
LT. GOV. CRUZ BUSTAMANTE: The folks at the top have to pay their fair share, the folks at the bottom have to pay something, and the people being squeezed in the middle need some relief from car taxes and college fees.
PROTESTERS: No recall!
JEFFREY KAYE: Labor unions opposed to the recall are calling for tax hikes on corporations. Nick Beradino of the Orange County Employees Association says tax-loathing voters also need to understand the connection between taxes paid and services received.
NICK BERADINO: Talk to any Californian. They want the cleanest water, they want the best roads, they want the nicest parks, they want the best school systems, they want the best public protection, fire protection, ambulance services. They want all this, but somebody has to pay for it.
JEFFREY KAYE: The California Chamber of Commerce advocates lower taxes and less regulation. It has endorsed Republican Arnold Schwarzenegger, who at a recent executive meeting championed the chamber's principles.
ARNOLD SCHWARZENEGGER: As governor, I will stand up to the anti-business legislators. I will stand up to Sacramento's job-killing philosophy of overtax, overspend, and overburden.
JEFFREY KAYE: Chamber President Allan Zaremberg says raising taxes to rescue the California budget would be a huge mistake.
ALLAN ZAREMBERG: Well, I haven't seen a proposal that would provide for additional taxes, or revenues, that doesn't harm the economy. We need to put jobs first because the solution, the only long-term solution for California's economic or budget crisis, is to improve the economy.
JEFFREY KAYE: In some measure, California's problems are not unique. The percentage of job losses, for example, is about the same as the nation's. What does set California apart, as the fifth largest economy in the world, is the magnitude of the problem-- none of which leaves teachers in Anaheim feeling very confident. Because of cuts, Amy Asaoka- Nakakihara lost her assistant in her fourth grade class. Her salary has been frozen, and both she and her school district expect things to get worse.