Deukmejian Calls State Economy ‘Sound’ but Davis Warns of Deficit

Gov. George Deukmejian declared Thursday that California state government’s “fundamental fiscal health is sound” despite a projected drop of $1 billion in income tax receipts, but Controller Gray Davis warned that the state’s $41.9-billion budget could already be running a deficit and said “the news is bound to shake Wall Street.”

Deukmejian’s comments on the subject were his first since word got out Tuesday that personal income tax receipts are running as much as $1 billion below expectations, a development that could erase the state’s nearly $1-billion budget reserve and cause sharp cutbacks in next year’s budget.

The news caught not only Deukmejian, but all other state officials by surprise. Based on actual cash proceeds from April 15 tax filings, it came just about six months after the state handed back California taxpayers $1.1 billion in income tax rebates.

Deukmejian, in addition to his assessments of the state’s overall fiscal health Thursday, said he was convening a staff-level working group to study the reasons for the sharp drop in revenues and report back to him within two weeks. The nine-member working group will be composed of high-ranking staff from legislative tax committees and state departments monitoring tax collections and budget developments. It will be headed by state Finance Director Jesse R. Huff.

“Once we receive this information, we will then formulate steps to address this situation and proceed with the traditional May revision of the proposed budget,” the Republican governor said in a prepared statement released by his office.

“I wish to emphasize that California’s economy is very strong and thanks to our insistence on a prudent reserve, California’s fundamental fiscal health is sound.”

Davis, saying he considered the state to be in “a fiscally perilous position,” said he did not think that Deukmejian was going far enough. He said Deukmejian should immediately convene a budget summit meeting made up of legislative leaders and constitutional officers to work out a plan.

“Now is not the time to sit back and take a wait-and-see attitude,” said Davis, a Democrat.

The controller said that if an assessment by Legislative Analyst Elizabeth G. Hill’s office that revenues are $1 billion off is correct, then “we are projecting a $50-million deficit at the end of the fiscal year June 30.”

Deukmejian, speaking to reporters before attending a political dinner later in the day, said he believes that the rainy-day reserve will be enough to see the state through the fiscal crisis. He said he does not foresee a deficit.

“Fortunately, we have the prudent reserve and therefore we’re not in any crisis situation where we would go into a deficit mode. So we’re protected and we’re in good fiscal condition because of the fact that we’ve maintained that reserve,” Deukmejian said.

Davis said the deficit problem could get worse if major state programs, such as Medi-Cal, the $6-billion medical services program for the needy, report year-end deficits, as they frequently do.

In a new development, Davis warned that state bank and corporate income tax receipts are also running well below projections. He said that as of March 30, revenues from these sources were off $260 million.

All of that adds up to bad news for investors, Davis said. He noted that this June and November, Deukmejian and legislative leaders are asking voters to approve $6 billion in bond measures.

Referring to the shortfall, potential deficit and other problems, Davis said California may have to pay higher interest for the money it wants to borrow and face the possibility that Wall Street bond rating agencies will reduce the state’s AAA bond rating.

“This news has to shake Wall Street’s confidence in the state’s ability to meet its obligations,” Davis said.

The shortfall may have have already created a budget deficit because Deukmejian has been basing his budget on expectations that the state will end the year with a $960-million reserve. A $1-billion shortfall in receipts could erase that, and then some.

There is a prospect of major budget cuts because the governor had been expecting to carry the reserve over into the next fiscal year. Since Deukmejian is committed to a $1-billion reserve, he would have to find extra revenues or replace the lost money with budget cuts.

Despite the huge drop-off in expected income tax receipts, Davis said the state has enough cash on hand to pay its current bills, although he indicated that the state will need to borrow before it closes its books June 30.