California Deficit Skyrockets

California Gov. Gray Davis this week reported a massive budget shortfall, despite the fact the state was enjoying a $10 billion surplus when he entered office four years ago.

"The shortfall is $34.8 billion, far more than any expert predicted," Davis said Thursday, announcing his administration's budget projection for the next 18 months.

Davis blames the poor economy and a decline in tax revenue, due in part to the burst of the technology bubble and the subsequent fallout in the stock market.

But critics say the real problem is the 35 percent increase in state spending that has occurred since Davis took office.

"Any of the budget experts saw this coming. They've been warning about it for three years and said you've got capital gains boosts coming from the stock market. Don't spend that money put into capital projects, put it into reserves," said Republican strategist Arnold Steinberg.

Davis is now proposing as much as $10 billion in cuts for education and health care programs.

"Spending is always a temptation when there's a lot of money coming in the door, as it was my first two years. But relative to my predecessors, I think we did a pretty good job," he said.

In an effort to stop the hemorrhaging, Davis appointed Steve Peace, a former lawmaker and key architect of the state's failed electricity deregulation plan, as his top budget adviser.

However, this decision has baffled some.

"It's ironic that Davis would bring Peace in to fix the problem that has at its roots the disaster that Peace helped create," said Doug Heller of the Santa Monica-based Foundation for Taxpayer and Consumer Rights, referring to the electricity crisis that forced the state to use its surplus to purchase expensive energy from neighbors.

The governor has also warned that new taxes are inevitable.

"When people ask me, 'Are you going to propose tax increases?' I say look at last year. About 20 percent of the solution was tax increases and you can expect something similar this time to what I did last year," he said.

California isn't the only state facing the largest deficits since World War II. Forty-one of the 50 states collected less revenue in 2002 than they had budgeted and 16 had negative growth.

To plug the gaps, many states have had to make cuts across the board and lay off employees, and several are considering raising taxes or asking the federal government for help.

Fox News' Anita Vogel and The Associated Press contributed to this report.