Analyst Calls Governor’s Budget Over the Limit

Gov. George Deukmejian’s proposed $36.7-billion state budget exceeds the constitutional limit on spending by $238 million--money that may have to be returned to the taxpayers, Legislative Analyst William G. Hamm testified Monday.

Further complicating the issue, the Administration has underestimated spending on such programs as Medi-Cal and welfare by nearly $500 million, he said.

Confronted for the first time by the Constitution’s spending limit, the Legislature may have to choose between fully paying for these programs and setting aside an emergency reserve of $1.16 billion as Deukmejian has proposed, the nonpartisan fiscal analyst said.

“There can be no doubt that California has entered a new era of state finances,” Hamm testified before the Senate Budget and Fiscal Review Committee as it began deliberations on the governor’s budget.

The spending limit, approved by the voters in 1979 as Proposition 4, could put the Democrat-controlled Legislature in the rare position of approving less spending than was advocated by the Republican governor. The initiative placed a lid on government spending, using a formula based on such factors as population growth and the rate of inflation.

In recent years, a combination of low inflation and a prospering economy has created a situation where the state may have more money than it legally can spend. Proposition 4 requires that any surplus be given back to the taxpayers within two years.

Deukmejian’s own Department of Finance had estimated that the governor’s budget for the fiscal year starting July 1 would hold state spending to a level $100 million below the limit. But Hamm said the department overestimated the limit by $71 million and did not include $267 million in spending that would be subject to the lid. This means the state would actually be $238 million over the limit, he said.

The governor’s finance director, Jesse R. Huff, who also testified before the committee, did not respond to Hamm’s analysis. But after the hearing, he hold reporters that Hamm had mistakenly counted money allocated in previous years that is not subject to the limit.

Hamm said in an interview that the state may be able to avoid the limit by diverting money to local governments. But that option would not last long, because the cities and counties would soon reach their own spending limits, also imposed by the ballot measure.

“It is a real predicament,” Hamm said. “It may be possible to postpone judgment day beyond (fiscal) 1986-87. But if the economy remains healthy, we’re going to find we have more money than we’re able to spend.”

In his testimony, Hamm cited a series of flaws in the budget that he said would compound the problem of maintaining the current level of state programs while staying within the limit.

Deukmejian’s budget underestimates state spending by $474 million, including $210 million in Medi-Cal expenditures, $122 million for Aid to Families with Dependent Children, and $114 million in state contributions to the public employees retirement fund, Hamm said. The governor’s proposal also overestimates state revenues by $92 million. Altogether, this would necessitate reductions totaling $566 million either in programs or the emergency reserve fund, Hamm said. It could result in slashing the governor’s proposed emergency reserve by nearly half, to $594 million, he said.

Furthermore, Hamm said, the governor’s budget does not anticipate a likely reduction in federal money to California under the deficit-cutting Gramm-Rudman Act. Nor does the budget include any money to pay for programs that the Legislature develops.

“This year’s budget . . . is one that needs work--a lot of it,” Hamm said. “Unless the Administration ties these loose ends together during the coming months, you will be stuck with the task of cutting appropriations in order to make the numbers add up and keep them within the limit.”