Billion-Dollar State Surplus Is Threatened

In a double-dose of bad news that could wipe out most of the state’s projected billion-dollar surplus, the Deukmejian Administration revealed Wednesday that tax revenues could fall $500 million short of expectations this year while Medi-Cal, prisons and other programs are running $400 million over budget.

The developments are the first acknowledgement since the Nov. 4 election that Republican Gov. George Deukmejian’s so-called rainy-day reserve fund might be as sick as Democratic critics for months have been saying it was.

During the campaign, Deukmejian brushed aside criticism that his Administration was underestimating major potential expenditures in order to make the fiscal outlook appear better than it actually was.

Budget Cuts Sought

But on Wednesday, less than six weeks after the election and just halfway through the budget year, Deukmejian spent the day huddled with top budget officials seeking ways to cut the current year’s budget and preserve a portion of the once-robust surplus.

Deukmejian ordered state Finance Director Jesse R. Huff “to take immediate action to ensure that state government lives within its income.”

Administration officials said unless cuts are made immediately, virtually the entire reserve could be wiped out by the end of the year.

Lois Wallace, assistant director of the Department of Finance, said Deukmejian will not allow the reserve to be exhausted.

“What we are saying is cut spending now. We can’t just take the money out of the reserve and say it will get better next year,” she said.

Among the cost-cutting measures being considered are postponing new purchases, program delays, hiring freezes and spending ceilings in individual departments. However, no specifics have been agreed upon.

Department of Health Services officials, struggling with a projected $280-million overrun in the $5-billion Medi-Cal budget, said they are considering 10% reductions in amounts paid for doctor and dental visits and for a long list of other medical goods and services. In addition, health officials are discussing delays of up to 90 days for so-called non-emergency services that could include hernia operations, breast reconstruction after cancer surgery and physical therapy.

Department of Health Services officials said Medi-Cal problems will continue into next year and may result in proposals calling for major changes in the way care is delivered to the needy. But just what form the adjustments will take has not yet been determined.

Department of Finance officials acknowledged that they seriously underestimated Medi-Cal expenditures and overestimated potential Medi-Cal savings, in effect confirming the views of their critics.

In a report last February, the staff of then-Legislative Analyst William G. Hamm called the Administration’s Medi-Cal cost estimates “phony.” Last month, acting Legislative Analyst John Vickerman said part of the Medi-Cal funding problem stemmed from the Deukmejian Administration’s decision to choose the lowest estimate of what was required to run the program, a $115-million error.

Vickerman said in the report that the governor’s so-called rainy-day reserve could dip as low as $138 million by the end of the fiscal year next June. He accused the Administration of being too optimistic about the economy and trends in state spending.

Deukmejian has frequently pointed to his $1-billion surplus as proof positive that he has restored fiscal solvency to the state after inheriting a $1.5-billion deficit when he took office four years ago. The governor often told audiences that he had taken California “from IOU to A-OK” by championing balanced budgets and prudent reserves.

But on Wednesday, Finance Director Huff said state revenues could be down by as much as $500 million, due mostly to a weaker economy and the resulting loss of sales and business taxes.

Administration officials are talking about spending pressures throughout state government, not just in the Medi-Cal program.

Chief among the other areas of concern was a surge in the state prison population that has resulted in a possible shortfall of nearly $100 million in the Department of Corrections budget.

Prison officials recently disclosed that there would be 7,775 more inmates than they had anticipated, raising the total population to 65,135 prisoners by the end of the year.

The increased inmate population will mean increased expenses for feeding and clothing prisoners, as well as the need for more staff, such as guards, doctors and other personnel to accommodate them.

In describing the state’s Medi-Cal woes, Dr. Kenneth W. Kizer, the state’s health services director, lamented: “These facts are very grim.”

He pledged to deal with the problem in a way that will have the least harmful effect on patient care.

At one briefing session Wednesday on Medi-Cal finances, legislative staff members booed and hooted Administration officials who admitted that their Medi-Cal spending estimates had proved incorrect but contended that they were reasonable at the time.

Assemblyman John Vasconcellos (D-Santa Clara), who chairs the Assembly Ways and Means Committee, issued a blistering statement arguing that the deficit should have been “no surprise” and calling it “overt under-budgeting.”

Kizer told his Medi-Cal advisory committee: “We are going to have to make ends meet at the end of the year.”

However, without a change in existing law, the Deukmejian Administration has little choice but to find the money to cover most Medi-Cal services.

Under current statutes there are only a limited number of steps that the state Department of Health Services can take to reduce spending during the current budget. Kizer can order 10% cuts in fees paid for non-hospital care, including such services as kidney dialysis, artificial limbs and prescription drugs.

He can also order postponement of non-critical services. However, Kizer stressed that no decision has yet been made on whether to impose discretionary cuts. However, the reductions become automatic when spending in any category begins to exceed the budget by 10%--something that has already occurred for prescription drug costs.

But all the cuts allowed under current law would only reduce state Medi-Cal spending by $20 million.