California Elections : Deukmejian’s Fiscal Record: Is He ‘Scrooge’ or ‘Mr. Moneybags’?

Republican Gov. George Deukmejian, as he campaigns for reelection, loves to tell audiences that he guided California through its worst fiscal crisis in modern history without a general tax increase.

“We’re making a record commitment to schools, roads, law enforcement, toxic cleanup and the disadvantaged--and we’re doing it all without raising general taxes on people or business,” Deukmejian recently told a group of business leaders, summing up his budget policy.

But if you are one of those Californians who bought a new car, rented a movie, purchased a home or attended community college in the past couple of years, you paid a higher tax or fee as the result of legislation signed by Deukmejian.

The apparent contradiction centers on Deukmejian’s definition of a general tax increase.

In Deukmejian’s view, a general tax increase is something that raises the sales or income taxes, broad levies that effect just about everybody. What Deukmejian signed, in his opinion, were tax “loophole closures” and “equity measures.”

Altogether, the tax and fee legislation signed by Deukmejian raised about $2.4 billion during his four-year term. When coupled with sharp increases in sales and income tax collections that were generated by the economic upturn, they helped finance record spending on education, the largest prison expansion program in state history and increases in other programs.

Deukmejian’s fiscal record has been mixed, with relatively liberal spending in areas such as education, and tight-fisted policies in other areas, such as his effort to hold down the size of the state work force.

During his nearly four years in office, Deukmejian has played both Scrooge and Mr. Moneybags as he took the state from an inherited $1.5-billion deficit to a healthy $1-billion budget surplus. And while state expenditures have sharply increased, the Republican governor has vetoed 1,677 spending bills--worth $3.5 billion--that have been sent to him by the Democratic-controlled Legislature.

The state is spending $11.7 billion more this year than when Deukmejian took office, a sum that represents a 46% increase in the state budget since the governor outlined his spending plan in January, 1983. The biggest share of funding increases has gone to education programs.

A treasury fat enough to provide for nearly $3 billion each year in new spending is a far cry from the fiscal situation that confronted Deukmejian when he took office.

The bottom dropped out of state revenues in 1982, the result of the national recession and the drying up of once huge surpluses that had cushioned the blow of the 1978 property tax-cutting Proposition 13.

The first things Deukmejian faced after becoming governor were a $1.5-billion budget deficit and a fiscal crisis that few predicted could be resolved short of a whopping tax increase. So Democrats, remembering that Deukmejian had carried then-Gov. Ronald Reagan’s tax increase bill when he was a state senator, put him to the test.

“People remembered that when Ronald Reagan took over as governor, he faced a very similar situation, a looming deficit and pressure to raise taxes,” recalled Sen. John Seymour (R-Anaheim), chairman of the Senate GOP Caucus.

Reagan, like Deukmejian, had campaigned against tax increases. And lawmakers figured that if Reagan could reverse himself on taxes, so could Deukmejian. Democrats proposed tax increases that would have generated up to $2 billion a year, including a proposed penny increase in the sales tax.

‘Iron Duke’

Deukmejian fought off the Democrats’ more ambitious tax hike schemes, although he eventually signed legislation that increased taxes and fees by about $600 million a year. The governor’s hard-nosed negotiating style won him the name “Iron Duke.”

At one climatic moment during the budget fight, Deukmejian said he would rather see the state’s bond rating drop than give in to Democratic pressure for a tax increase.

It happened.

California’s once proud “AAA” bond rating was dropped from “AA+” to “AA, declining,” and the state was put on a “credit watch” by New York brokerage firms, the effect being that the state had to pay more to borrow money.

Sen. Barry Keene (D-Benicia), the Senate majority leader, recalled, “He was prepared to decimate programs--I was absolutely convinced of it--in order to avoid a tax increase, regardless of the merit of the programs.”

As frequently happens in the Capitol, both sides gave a bit, and the crisis ultimately was resolved by adoption of an 18-month fiscal rescue plan.

Deukmejian went along with the package of tax and fee increases, Democrats agreed to budget cuts, and the state borrowed what it could not make up elsewhere from Wall Street brokerage firms. For the first time, the governor and legislators willingly agreed to carry an operating deficit from one year to the next.

Unneeded ‘Trigger Tax’

The agreement was based on a belief by Deukmejian that the economy would pull out of the recession. To guard against the possibility that the economy might not recover, the governor grudgingly signed his name to legislation calling for a temporary one-cent increase in the sales tax to erase the deficit.

The so-called “trigger tax” was never needed.

State revenues seemed to recover almost overnight when California’s high-powered economy got healthy in the later part of 1983.

“He basically held the line until the economy righted itself and revenues began accumulating in the treasury. He had some luck,” said William G. Hamm, who until earlier this year was the Legislature’s nonpartisan budget analyst.

Deukmejian’s view is that holding the line against Democratic majorities in the Senate and Assembly involved much more than luck.

Steven A. Merksamer, the governor’s chief of staff, claims that closing the deficit and building up a reserve “is clearly the governor’s crowning achievement, and it didn’t happen by magic.”

For one thing, it took a lot of vetoes of spending bills, Merksamer said.

‘Great Deal of Pride’

“If that money had not been blue-penciled, we wouldn’t have a $1-billion reserve and we’d be staring in the face of a $2-billion deficit. So it is an achievement with which the Administration takes a great deal of pride,” the governor’s top aide said.

As for the matter of a tax increase, a key index maintained by the Department of Finance shows that Californians are paying more taxes per $100 of personal income than they were when Deukmejian became governor. During Democrat Edmund G. Brown Jr.’s last year as governor, the state took in $7.17 per $100 of personal income; this year, it collected $7.81.

Deukmejian’s Democratic election opponent, Los Angeles Mayor Tom Bradley, said recently of the governor’s contention that he has not raised taxes:

“It’s one of the most gross, outrageous efforts to mislead the people that I’ve ever seen come from a politician. He said when he was running four years ago he would not raise taxes during his first Administration. In fact he has raised taxes and fees by $2.4 billion. That’s a lot of money. It’s hit every Californian.”

Deukmejian aide Merksamer disputes Bradley’s figure.

“I disagree with the $2.4-billion figure and I think the public does too,” Merksamer said. “. . . I think the public generally is in favor of tax-loophole closing, particularly when it was tax breaks for certain special interests that were closed.”

Accelerated Collection

One of the measures Deukmejian signed in 1983 accelerated the collection of property taxes from purchasers of new homes who previously had been given up to a year’s grace period before being sent a tax bill.

Another bill increased motor vehicle license fees by taxing accessories on new car purchases, rather than basing the fee on a stripped-down version of the car. The legislation also abolished solar and energy conservation tax credits, reduced deductions allowed on income taxes for medical expenses, added the 6% sales tax to vending machine and home video rentals and made several other changes.

These tax and fee hikes, which Democrats point to in their anti-Deukmejian rhetoric, helped finance education spending increases strongly supported by Democrats.

Today, state support for education programs from kindergarten through the University of California law and medical schools consumes 47% of state spending and 55% of spending out of the General Fund operating budget. The governor prefers to use the larger figure. Either way, it is the highest share for education in 20 years.

This year’s $37-billion budget includes increases in all General Fund education spending categories at a level higher than the rate of inflation, a hallmark of Deukmejian’s budgets during the economic recovery.

4-Year Hike of 53.5%

Current fiscal year spending for the University of California is up 9.1% over last year. It is up 7.7% for the California State University system, 7.1% for the community colleges and 9.8% for kindergarten through high school. Overall, four-year totals for all education categories show an increase of about 53.5%.

Spending on state public safety programs, including prisons, the California Highway Patrol and other programs, is up 78% over four years. The Department of Finance said the number of budgeted positions for prison guards, state police and the California Highway Patrol is up 39%.

By and large, education and law enforcement have taken the lion’s share of new money.

Health and welfare programs have slid from 33.5% to 30% of the state operating budget during the governor’s first term. Although human services programs have lost ground to education overall, however, their budgets have also been on the rise, going up 26% in four years.

This year, sales, income and other tax revenue increased by $3 billion over the previous fiscal year, which, after the governor set aside $1 billion for a reserve, allowed $2 billion in new spending.

An analysis of the governor’s budget by John Vickerman, acting state legislative budget analyst, showed that 72% of the new money went to education programs, 11% was earmarked for prisons and all other state programs--health, welfare, parks, toxic waste control and transportation among them--had to compete for the remaining 17%.

Bond Rating Restored

One of Deukmejian’s proudest accomplishments has been to restore California’s AAA credit rating, the highest ranking given by Standard and Poor’s, the New York bond-rating firm that had lowered the state’s rating to AA.

The bond-rating decline began after passage of Proposition 13, hit the AA level during the fiscal crisis, then was raised back to AAA by Standard and Poor’s in July. Jane Eddy, an analyst with the bond-rating firm, said the chief reasons for the upgrading were the state’s “strong financial management” and Deukmejian’s commitment to maintaining a $1-billion budget reserve.

Deukmejian has justified scores of budget vetoes on grounds that they were needed to protect the reserve, a so-called rainy-day fund to be used against unforeseen fiscal emergencies like the recession-caused plunge of tax revenues in 1982.

In a recent letter to Assembly Speaker Willie Brown (D-San Francisco), Deukmejian used language that has characterized his budget approach from the beginning in complaining that the Legislature had sent him $400 million in spending bills without new revenues to pay for them. As a result, he warned that many would have to be vetoed in order to protect the reserve.

The governor wrote: “Under no circumstances will I approve $400 million in budget-busting overspending. That would put us right back on the downhill course followed before I became governor: record deficits, IOUs, a falling bond rating and disruptions in essential services.”

Giant-Sized Headaches

Although Deukmejian has gained much political capital from his stance as protector of the state treasury, knowledgeable state officials say his budget policies will leave the victor of the Nov. 4 gubernatorial election with some giant-sized headaches.

Retiring Sen. John Foran (D-San Francisco), who has served as chairman of the Senate Transportation Committee during Deukmejian’s first term, complains that Deukmejian’s opposition to a general gasoline tax increase ignores “a critical need” to repair local streets and highway, which he said are “falling apart.”

Foran, the Legislature’s longtime expert on highway finance, gives credit to Deukmejian for increasing funding for roads and highways, including a two-year, $340-million increase in spending approved last year. He said, however, that conservative estimates are that the state needs $400 million more a year to meet the need.

“I believe a gasoline tax increase is inevitable and absolutely necessary,” said Foran, whose proposal for a five-cent gasoline tax increase was blocked by Republicans last year.

The Administration counters by offering statistics that show the governor has approved $19 billion in capital spending during his first four years, most of that for highways.

Another looming problem is education.

State Schools Supt. Bill Honig said that even with the new spending approved by the governor, California has the worst classroom overcrowding problem in the nation. He also said the governor’s budget will be just enough to allow school districts to keep going at current levels and provide for the annual influx of 150,000 new students.

$2 Billion More Sought

Honig is pushing for an extra $2 billion over the next four years, something Deukmejian so far has not indicated he will support.

Even if the governor is willing, a major obstacle in the way of new funding is a constitutional spending limit approved by voters in 1979 as an aftershock of the tax revolt that created Proposition 13. The 1979 measure, Proposition 4, authored by tax crusader Paul Gann, basically limited the growth in state spending to increases in population and inflation.

Whoever is governor in the next four years will be confronted with this spending limit, which for the first time will have an effect on state fiscal policy.

On the whole, Honig--who holds a nonpartisan office and generally attempts to play a nonpartisan role--said he is pleased that the governor’s first four budgets have resulted in real gains for the schools, even when inflation and the increase in the student population are taken into account.

“There has been an appreciable increase both in actual funds and the priority given to education,” he said.

Hamm claims that other budgetary problems have resulted from the rigid, feet-in-concrete approach the governor often assumes in budget matters.

‘Heavy Overtime’

Hamm said the governor has been so intent on not increasing the size of the state work force that “heavy overtime” costs have developed in some departments, particularly the Department of Transportation.

Related to that is the governor’s pursuit of contracting with private firms to perform tasks previously done by state employees. Several proposed contracts were shelved after Hamm’s office found that they would have ended up costing the state more, not less.

“They wanted to do some highway landscaping for $1 million. We showed it could be done by state employees for $600,000,” Hamm said.

In addition to restoring the state’s bond rating, generating new funding for education and expanding the prison system, Deukmejian has managed several other budget accomplishments.

Local governments, which took the brunt of the cut in property tax revenues that occurred with passage of Proposition 13, benefitted by a complex financing plan pushed through the Legislature by Deukmejian. It called for local governments to receive a fixed share of motor vehicle license fees and other state revenues and guaranteed them a permanent, stable source of funding.

The governor also held up a $1.6-billion school aid package in 1983 until the Legislature agreed to a series of such “reforms” as stronger teacher discipline measures and longer school days.

Despite the sharp increase in state spending over the past four years, Deukmejian has come close to achieving his goal of keeping a lid on the size of the state work force. The number of authorized positions in state government today--roughly 233,000--is only about 4,500 more than when he took office.

STATE SPENDING Deukmejian’s Record (In Billions of Dollars) Figures reflect spending in all state funds:

1982-83* $25.3 1983-84 $26.8 1984-85 $30.9 1985-86 $36.1 1986-87 $36.9

These figures reflect tax revenues in general and special funds:

1982-83* $24.2 1983-84 $27.6 1984-85 $31.6 1985-86 $33.5 1986-87 $36.4

*Last year of Gov. Edmund G. Brown Jr.