Deukmejian Asks 5.7% Budget Hike : $44.3-Billion Spending Plan Calls for Borrowing Record $3.9 Billion

Gov. George Deukmejian asked the Legislature for a 5.7% increase in state spending Thursday, introducing a $44.3-billion state budget that adds significantly more money for schools, prisons and highways and calls for borrowing a record $3.9 billion.

Deukmejian, who has departed from his once-cautious approach to borrowing, said he will ask voters to approve the nearly $4 billion in bonds necessary to finance new construction and maintainance projects for schools, prisons and highways.

That is nearly twice the amount of new debt the governor has previously allowed his Administration in any one year.

The governor, during a press briefing in the Capitol, said his fiscal 1988-89 budget “enables us to devote more funds to the priority areas that I established upon becoming governor and that we’ve maintained throughout the course of our Administration, namely education, job creation, transportation and protection of the public’s health and safety.”

Total Package

When federal funds coming to California to help support programs run by the state are counted, the total spending package comes to $61.5 billion.

Education programs at all levels would receive 31% of all state money during the next fiscal year, which begins July 1.

The education programs, ranging from University of California graduate schools to kindergarten classes and contributions to the teachers retirement system, will receive collective increases of 7.1% when all revenue sources are counted, including money from the state lottery and local property taxes, according to the new budget.

Deukmejian, addressing one of the budget issues that created political problems for him last year, said his new budget would give schools “more funding per pupil in our kindergarten through 12th-grade public schools than ever before in the history of our state, even after adjusting for inflation.” Last year, the governor was criticized because he did not provide schools with enough new money to allow them to maintain their purchasing power.

Although the new budget would increase funding per pupil to $3,552, when adjusted for inflation, that is only $4 more per student than schools received two years ago.

Supt. of Public Instruction Bill Honig, who last year described Deukmejian’s budget as a “disaster” for schools and was the governor’s most vocal critic, appeared somewhat happier this time around.

“This allocation is within the range of fairness,” Honig said after reviewing the new spending plan. “Obviously there is a lot more we can do. (But) there is a vast difference in what was proposed last year and what is proposed this year.”

After schools are financed, health and welfare programs would receive 26.2% of all state dollars, with prisons, housing and other programs dividing the remainder.

Spending on the prison system would jump 14.4%, to $1.7 billion. The Medi-Cal program, which provides medical services for the poor, would get a 7.4% increase, to just over $6 billion. Welfare recipients and others receiving monthly living grants would receive increases of 5.7%.

Reaction from Democratic leaders in the Legislature was mixed.

Senate President Pro Tem David A. Roberti (D-Los Angeles) said the spending plan “is relatively generous in terms of funding for the status quo.”

Roberti called the spending proposal for public schools “relatively generous.” But he criticized the governor for providing for what he described as only “a very modest increase” in programs to combat AIDS and “no significant” increase in spending for the homeless.

Assembly Speaker Willie Brown (D-San Francisco) said the budget is “far superior to those (Deukmejian) has put together in the past” because it provides full increases tied to inflation for welfare recipients and others.

But Brown said he is “gravely concerned” about the amount of borrowing the budget would require. He said he is “wary” about “obligating too much of the state’s general fund to debt service.

Using bonds to finance school, prison and highway construction solves two problems for Deukmejian.

Although it places a burden on future generations of Californians who will have to pay off the debt, spreading the bond payments out over a number of years allows the state to spend more than otherwise would be allowed under a spending limit approved by voters in 1979. That’s because the spending cap does not apply to voter-approved bond payments. Bonds also give the governor new dollars for state programs without being forced to ask for a tax increase.

But the sharp increase in the quantity of bond expenditures is a relatively new phenomenon. Bonds have always been used as a means of financing school and prison construction, but never at the rate Deukmejian is proposing. Interest payments on the bonds next year will cost the state $650 million, more than twice the amount spent paying off debt when Deukmejian took office in 1983.

Using general obligation bonds to pay for highway projects also is new. Historically, money to expand and maintain the highway system has come from highway taxes and user fees on a “pay-as-you-go” basis.

Assembly Speaker Brown and some other Democrats, acknowledging the need to spend more money, would prefer raising the tax on gasoline or other highway user fees to finance highway construction.

But Deukmejian has strongly resisted tax increases, which he believes would be politically unpopular and harmful to the state’s economic growth.

One of the governor’s legislative critics, Assemblyman Richard E. Floyd (D-Hawthorne), said that “(The governor) keeps hitting us for being tax, tax, tax, spend, spend, spend, when he is borrow, borrow, borrow, spend, spend, spend.”

The governor wants authority to sell $1.6 billion in bonds for public school construction, $700 million in financing for state college and University of California projects, $1 billion for streets and highways and $600 million for toxic control and environmental cleanup programs.

Prison Picture

In addition, state Finance Director Jesse R. Huff said Deukmejian will ask the Legislature for bonding authority for additional prison construction, but he did not say how much he thought would be needed.

Elsewhere in the budget, Deukmejian anticipates hiring 9,000 new state employees, all but surrendering on his goal of not allowing state government to grow.

One of the biggest increases would be in the Department of Transportation, where Deukmejian wants 1,200 new employees to help speed the construction of highways. The budget also calls for an additional 150 new California Highway Patrol officers.

In addition, the governor wants to add 2,200 new prison guards and others needed to maintain control over the state’s burgeoning prison system. The budget anticipates 9,100 new prisoners being added to the state’s inmate population, for a total of 81,000, triple the number of inmates under lock and key when Deukmejian became governor.

While the number of new employees will rise, Deukmejian is proposing a 4% pay raise, not to start until next January for employees now on the job. Because of the delay in implementing it, the pay raise would amount to 2% when spread out over the full budget year.

Employees ‘Angry’

Gene Preston, general manager of the California State Employees’ Assn., which represents 125,000 active and retired members, said, “My members are angry.”

Last year, after Deukmejian proposed a similar 4% delayed pay raise, the union took a strike vote and 80% of those voting wanted to walk off the job. But because only 35% of those eligible to vote cast ballots, the union decided not to strike and reluctantly accepted the governor’s offer, Preston said.

Brushing aside warnings of a possible recession this year or next from some prominent financial forecasters, Deukmejian’s budget writers based their assumptions on continued prosperity this year and next.

The finance director told reporters at the press briefing that he and his staff believe that California’s economy will continuing growing, at a rate of about 2%, in both 1988 and 1989. If the economic expansion continues into its sixth year, as the budget anticipates, it would be unprecedented in a peacetime economy.

The issue is important because if the economy does not perform as well as expected and tax revenues fall well below those projected by the budget writers, a huge deficit could develop, requiring emergency cuts, as occurred in 1983.

Huff said he and his staff came to their conclusions despite the stock market crash of last October, weakness in the value of the American dollar abroad, and slumping car and home sales.

“We are not quite as optimistic about 1988 as we were, say, nine months ago, but 1988 will be a good year,” Huff said.

Great Expectations

The budget is based on expectations that there will be a 7.6% increase in income, sales, bank and corporation and other taxes over the 12 months of the fiscal year, which includes the last six months of 1988 and the first six months of 1989.

Deukmejian does not anticipate another tax rebate, either this year or next.

Under the 1979 voter-approved initiative that created the spending limit, the state must return any surplus revenues sitting in the state treasury at the end of a given fiscal year. Last year, the first year the state took in more than it could spend, taxpayers received income tax rebates of $1.1 billion.

The new budget anticipates that the state will come within $24 million of the spending limit. Of course, the governor’s budget writers could be wrong. Last year at this time, the Department of Finance estimated that the state would be $421 million below the limit during the budget year that ended last June and failed to see the $1.1-billion surplus until a month before the end of the fiscal year.

A potential surplus in the new proposed budget that might have led to another rebate was headed off last year when an agreement was reached between the governor and Legislature to assume the costs of running county courts.

Under the plan, the state will assume responsibility for funding the courts, but will also receive all the revenues received from court-imposed fines, penalties and forfeitures. Because court-generated fines are not counted when the state computes the amount of its allowable expenditures, the money will have the practical effect of giving the state more room to spend. And the court costs will be counted as county expenditures when local government spending ceilings are computed.

Huff’s View

While the local government funding shift and bond financing give the state more freedom to spend under the limit, state Finance Director Huff insisted that they were not devised to get around the spending ceiling.

Huff said the state would not generate enough tax revenues during the upcoming budget year to exceed the limit.

As it has in the past, the governor’s budget calls for a $1-billion rainy-day reserve fund.

Although this is the level that Deukmejian recommended in previous budgets, it represents a smaller percentage of the state budget, about 3%, compared to 3.7% previously. In the past, key budget officials have recommended that the reserve should be as high as 5% to comfortably guard against sudden swings in the economy or unexpected expenditures.

STATE BUDGET HIGHLIGHTS Gov. George Deukmejian on Thursday proposed a $44.3-billion budget for 1988-89. Some details:

THE BOTTOM LINE

Overall, the budget is 5.7% larger than the current spending plan, boosted by increases in spending on education, prisons, transportation and other programs. The $44.3-billion budget grows to $61.5 billion when federal funds that flow to the state are included. No general tax increase is called for and the budget falls $24 million below a spending limit imposed by voters in 1979.

RESERVES

An estimated $1.1 billion is set aside for fiscal emergencies. Although the governor had sought to protect his $1-billion surplus this year, recent forest fires and other unexpected expenses will leave $626 million in the reserve account by the end of the current fiscal year.

STATE EMPLOYEES

Nearly 9,000 new state employees will be hired, more than double the number added by the Deukmejian Administration during the current budget year. That will swell the state work force to nearly 252,000 employees who collectively will earn about $9 billion. As in the past, the bulk of the new employees are needed to complete the Administration’s massive prison building program.

PUBLIC SCHOOLS

The state’s public schools will get a nearly $1-billion infusion of state funds equal to a 7.8% increase in the amount allotted during the current budget year. However, that represents only a $4 per pupil increase in spending over two years ago. The governor, however, has set aside $87 million for additional aid to urban schools pending a study of how the schools have used the money in prior years. He also will ask voters to approve $1.6 billion in bonds for new construction.

UNIVERSITY OF CALIFORNIA

UC’s budget will grow by 6.7% to $2.4 billion, but that will require a fee increase of 4.4%, or $60 per student. This is the second fee increase since 1983 and will raise the total student fee to $1,434 per year. Out-of-state students will pay an additional $4,506 per year. An estimated 3,500 new students are expected to enroll, bringing the total student population at the nine campuses to 147,095.

CAL STATE UNIVERSITY

Spending at the state university also will increase by 6.8% to a total of $1.88 billion. Fees will rise by 8.6% to $684 yearly for full-time students and $396 for those attending part-time. Deukmejian, however, added $2 million for additional financial aid to needy students. A variety of new projects are planned, including construction of a new School of Business at Cal State Long Beach.

COMMUNITY COLLEGES

Community college spending will rise 6.4% to a total of $2.2 billion with no increase in the $50-per-semester fee. Among other expenditures, the governor is setting aside $5 million for removal of asbestos.

NATURAL RESOURCES

The budget of the Coastal Commission, targeted in the past by the Deukmejian Administration, will increase by $300,000 to a total of $9.3 million. That will allow the agency to maintain its staff of 112. The budget also proposes to spend $18 million for purchase of parklands.

LAW ENFORCEMENT

An estimated 2,000 people will be hired to keep up with the pace at which new prisons are being built under the nation’s largest prison construction program. That is in addition to 2,500 new positions added just last year. The Administration expects to add capacity for another 3,000 inmates. On the highways, an additional $10.9 million will be spent to hire 150 uniformed highway patrol officers. A like number was authorized last year after an outbreak of violence on Southern California freeways.

HEALTH

About $70 million has been set aside for AIDS research, treatment and education. That is a $6-million increase over the current budget year, putting California ahead of nine other states that have significant AIDS caseloads. Once again, however, Deukmejian has set aside no additional money for the strained network of emergency care facilities known as trauma centers. The governor says he considers trauma centers a local responsibility.

WELFARE

About $140 million has been allocated to complete start-up of the state’s workfare program. Already, 22 counties have instituted the program that provides education, job experience and child support to encourage recipients to get off the welfare roles. An estimated 140,000 recipients will be participating by the end of 1988. A 5.2% cost of living increase is included for recipients of aid to families with dependent children and the blind, elderly and disabled.

TRANSPORTATION

In a stepped-up effort to fight traffic congestion, the Administration wants to spend $3.5 billion for various transportation projects. However, only $540 million is from the state’s general fund, with the rest expected to come from the federal government and a $1-billion general obligation bond that will have to be submitted to voters. The $204 million set aside for mass transit projects is less than the amount allocated by the Deukmejian Administration in its first year in office.

The Proposed State Budget Gov. Deukmejian proposed a $44.3-billion budget Thursday, about 6% more than the current $42-billion state budget. The spending plan now goes to the Legislature, which must act on it by July. As in the past, the governor assigned top priority to public education and maintaining a $1-billion budget reserve. To do so will require obtaining authorization for about $4-billion in bonds to finance school construction, highway and toxic cleanup. Revenues (in millions of dollars): Sales Tax -- $12,324 / 27.8% Insurance Tax -- $1,225 / 2.7% Highway Users Tax -- $2,408 / 5.4% Cigarette Tax -- $250 / 0.6% Motor Vehicle License Fees -- $1,938 / 4.4% Bank and Corporations Taxes -- $5,425 / 12.2% Liquor Tax -- $129 / 0.3% Bond Revenue and Other -- $4,825 / 10.9% Estate / Inheritance and Gift Tax -- $345 / 0.8% Personal Income Tax -- $15,428 / 34.9% Total: $44,297 Expenditures: State and Consumer Services -- $524 / 1.2% Tax Relief -- $885 / 2.0% Business, Transportation and Housing -- $2,440 / 5.5% Other -- $1,888 / 4.3% Local Government -- $2,514 / 5.7% Education (K-12) -- $13,655 / 30.8% Health and Welfare -- $11,593 / 26.2% Resources -- $1,123 / 2.5% Youth and Adult Corrections Agency -- $2,179 / 4.9% Higher Education -- $5,559 / 12.5% Selected Bonds -- $1,937 / 4.4% Total: $44,297