State Fiscal Realities Will Emerge in Budget Figures

The rosy picture of state finances painted by Gov. George Deukmejian in his reelection campaign last fall will become markedly gloomier when he presents his new state budget today.

The Republican governor must deal with huge budget deficiencies in two of the state’s largest departments--Health Services and Corrections--that he and his top advisers ignored, at least publicly, until after Californians had voted.

The department deficits, when combined with an anticipated $500-million drop-off in tax revenues, have resulted in expectations of a $900-million shortage in the current year’s $37-billion budget. And this would eliminate nearly all of the governor’s vaunted $1-billion budget reserve.

Two rounds of pre-Christmas budget cuts and fiscal adjustments already have helped recoup $158.7 million of the shortfall.

But Administration officials say that Department of Health Services spending is still running about $260 million over its current year budget while the deficiency in the Department of Corrections is now projected to be $60 million.

Against that backdrop, state Treasurer Jesse M. Unruh warned Wednesday at a meeting of the Independent Commission on State Finance that the state’s AAA bond rating could be jeopardized unless the governor and Legislature act to shore up the reserve.

The situation presents Deukmejian with unusually tough budget decisions because the state, for the first time, is so close to the constitutional lid on spending that voters approved in 1979.

With state spending allowed to grow only marginally, because of the 1979 amendment to the California Constitution, the extra dollars to pay off current year deficits probably will have to come out of next year’s budget. That could require some difficult political trade-offs by political leaders in the months to come.

Last year, Deukmejian campaigned in person and in television commercials, boasting that he had brought state government “from I.O.U. to A.O.K”--a catchy reference to the $1.5-billion deficit he had inherited from his Democratic predecessor, Gov. Edmund G. Brown Jr.

But the first warnings about shortages in the current year’s budget actually came nearly a year ago, when the legislative budget analyst’s office declared in February, in unusually strong terms, that Medi-Cal expenditure estimates were “phony” because the Deukmejian Administration had arbitrarily decided that money could be saved by various economies.

View Called ‘Wishful’

“These ‘savings’ in the Medi-Cal program are nothing more than wishful thinking,” wrote the staff of then-Legislative Analyst William G. Hamm about 10 months before the Administration officially announced that the program serving 3 million needy Californians would come up $280 million short.

The warnings began turning into reality in July, the first month of the fiscal year (which runs from July 1 through June 30).

Budget records show that spending on Medi-Cal was $9.9 million over the budget in July, $18.6 million by August, growing to $50.3 million in September, $63 million in October and $81.8 million in November, resulting in the projection of a $280-million shortfall by June.

The budget for the Department of Corrections was short even before the governor signed it in June, with the state prison system already having 3,000 more inmates than the spending plan provided for because unexpectedly large numbers of prisoners were coming into the system. By November, prison officials had 7,000 more inmates than they had budgeted for, with resulting budget overruns projected at $103 million because of the added cost of feeding, clothing and housing them.

Warnings of Deficits

During those same months, meanwhile, Administration officials privately were warning the governor’s office of the budget deficiencies.

As early as July, Health Services Director Kenneth W. Kizer wrote the governor’s office privately about the looming deficit in the state’s $5-billion-a-year Medi-Cal program. “It was no secret to anybody,” he said recently, adding that he had an “on-going dialogue” with Department of Finance officials throughout the year. Kizer agreed with the legislative analyst’s office on what it would cost to run the Medi-Cal program.

By late October, the Corrections and Health departments were projecting shortages totaling $380 million in budget documents being sent to the Department of Finance.

But at the same time, Deukmejian was telling voters that the state was comfortably in the black. “In four years, our policies have taken California from red ink to golden promise. We took a $1.5-billion deficit and turned it into a balanced budget and a $1-billion reserve,” the governor told a Town Hall audience last Oct. 30, five days before the election.

Soon Out of Balance

Six weeks after the election, the Department of Finance announced that a $900-million budget shortage had been created by lower-than-expected revenues and higher-than-anticipated expenditures.

Deukmejian’s press secretary, Larry Thomas, who served as the governor’s campaign manager, denies that there was a political motive in waiting until six weeks after the election to tackle the budget problem.

Thomas said that while the overruns in the medical services and prisons programs were a major problem, the emergency spending cuts were actually triggered by a $200-million drop-off in tax revenues in November, which projected to a loss of $500 million by the end of the budget year.

The governor’s spokesman said the budget figures came together in November and early December because that is the traditional time when mid-year spending is assessed and departments prepare proposed budgets for the coming year.

Legislature’s Outlook

As for the earlier warnings from Kizer, state Finance Director Jesse Huff said tracking of the problem was initiated but that he did not believe there was enough evidence to warrant immediate action.

Thomas pointed out that the Democratic-controlled Legislature went along with the Administration’s forecasts.

“The budget that was sent to us was not augmented, even though their own analyst suggested it was light,” Thomas said. He noted that even without adding more money for Medi-Cal, the governor vetoed $700 million in spending proposals added to the budget by the Legislature. “This is a Legislature that has never shirked or turned away from augmenting the budget when it felt that not enough was being spent.”

Huff, like Thomas, defends his budget forecasts on the grounds that the Legislature went along with him. “There really was very little controversy in the Legislature in May and June about the Medi-Cal budget,” Huff said. “Hindsight is wonderful. I just wish we’d all be able to conduct our lives using hindsight, but we can’t.”