As California's fiscal year began without a budget Tuesday, Gov. Gray Davis issued dual orders aimed at trimming costs from the state's work force.

Davis also predicted a quick end to the legislative budget standoff as the outlines took shape of a possible deal to finance a chunk of the state's deficit without raising taxes.

"While everyone else prophesies doom and gloom ... I continue to believe that we will see action by the end of this week," Davis said after signing the pair of executive orders.
One would chop $250 million from the budget by eliminating 20,000 vacant government jobs.

The second would extend for at least two years a hiring freeze first imposed by Davis in October 2001 when the state's fiscal slide was becoming apparent. The governor said the savings would amount to about $300 million.

The hiring freeze does not apply to public health, safety and security personnel, including those hired by the California Highway Patrol, the Office of Emergency Services, the Military Department, and some Department of Health Services offices, according to Davis' order.

Davis urged the Legislature and the judicial branch to join the halt in hiring.

The move is designed to reduce California's payroll costs, but Davis administration officials also are attempting to persuade state workers' unions to agree to salary or benefit reductions, or face layoffs to achieve $855 million in payroll cuts.

In the absence of a spending plan and a deal with workers' unions, the Personnel Department has issued 9,000 notices warning state employees they may lose their jobs. But Davis said Tuesday's move might spare some from losing their posts.

Legislators failed to pass a budget by the midnight deadline Monday. State Controller Steve Westly has warned that state cash will soon dry up and he will begin halting payments to state vendors, community colleges and schools.

Lawmakers have for weeks been frozen in disagreement over raising taxes to help fill a budget deficit expected to reach $38 billion by the end of this fiscal year. Democrats have put forth several plans that contain program cuts, borrowing, and sales tax and other tax increases. Republicans have called for deeper cuts and rejected tax hikes of any kind.

Legislative leaders, however, talked informally Tuesday about a possible compromise that includes financing $10.7 billion of the state's deficit over several years using complicated maneuvers that avoid a tax increase.

"The key sticking point upstairs is how in fact we are going to sell current-year deficit bonds," Davis said. "One reason for my optimism is that I do see the sides narrowing on that issue."

The complex deal would work something like this, several sources said Tuesday: The Legislature would repeal a half-cent or a quarter-cent of the sales tax now dedicated to local government, replacing it with a sales tax increase of the same amount for the state. Consumers would pay the same tax on purchases, but part of the revenue that used to go to local coffers would instead go to the state treasury.

To compensate local governments for lost revenue, the state would give them the same amount in property tax. In effect, that would reverse the change that occurred in 1992, when the state shifted property taxes from local governments to schools to reduce its own costs during the last fiscal crisis.

The maneuver would reassure Wall Street lenders that the state had a dedicated source of revenue with which to pay off bonds to cover $10.7 billion of the budget deficit, resolving a disagreement between the parties about whether lenders would require a brand-new source of revenue to pay off the bonds.

In his budget proposal, Davis had proposed paying off the bonds with a new, half-cent sales tax over five years. In one version of the proposal described Tuesday, it would take a decade or more to pay off the debt because the revenue for bond payments would be a quarter-cent instead of a half-cent.

The debt payments, which might not begin until the fiscal year that begins a year from now, would be $1 billion to $2.4 billion, depending on whether it was funded by a quarter-cent or a half-cent. The state presumably would have to make cuts in services to cover those costs.

The proposal has been discussed by fiscal staff and informally among some party leaders, but has yet to solidify.

"I've heard it discussed in the hallways," said Sen. Dick Ackerman, R-Fullerton. But he said his caucus has not discussed it yet. Some Republicans might balk at voting for a sales tax increase, he said, even though it would be offset by a reduction of the same amount.

It's uncertain whether the increase would fall under the requirement that tax increases be approved by a two-thirds vote of the Legislature. If it did, at least two Republicans in the Senate would have to join majority Democrats to pass the measure.

Democrats, meanwhile, may dislike the requirement to make further cuts to programs to pay off the deficit bond. Democrats have consistently argued that some tax increases are needed to soften the impact of budget cuts.

One effect of the deal would be to make local governments less reliant on sales tax. Policy-makers have long argued that the dependence on sales tax leads to skewed land-use decisions, with local governments encouraging sales tax-generating retail businesses at the expense of housing or manufacturing.

Replacing local sales tax revenue with property tax is the goal of a bill by Assemblyman Darrell Steinberg, D-Sacramento.

Steinberg said Tuesday that making the swap part of the budget deal would "begin us down the path of restructuring the state-local fiscal relationship." It would also set aside money for paying off the deficit bonds, he said.

But it leaves a hole of at least $1 billion in the state treasury, he said.

"It's more money the state will have to come up with at some point," he said.

Davis' finance director, former state Sen. Steve Peace, said the plan is only one of many that his department has vetted, but he also called it a legally workable plan.

"As long as a dedicated revenue stream -- a new dedicated revenue stream with no historical participation in the state general fund -- is produced, that will meet the legal requirements," Peace said.

"Whether you can balance the budget in terms of whatever adjustments are associated with it, that's for the Legislature to debate and figure out how to deal with."

Also Tuesday, the Howard Jarvis Taxpayers Association filed suit in Superior Court in Sacramento to try to reverse the recent tripling of the vehicle license fee. The fee's return to its 1998 level was triggered by the state's fiscal deterioration, Davis administration officials said.