Administration Seeking to Mask Budget Deficit, Gray Davis Says

State Controller Gray Davis charged Tuesday that the Deukmejian Administration is trying to “walk away” from legally binding contracts in order to mask a deficit in the state budget for the fiscal year that ended last June 30.

Davis, who contends that the state ended the 1987-88 fiscal year with a deficit of between $83 million and $343 million, said in a letter to Finance Director Jesse R. Huff that the Administration’s moves could leave the state liable for a civil suit.

The Administration so far refuses to acknowledge the deficit. Huff, hoping to save $80 million and allow the Administration to officially close the books on the 1987-88 fiscal year in the black, in January ordered all state departments to break contracts for goods ordered last year that have not yet been received. He insists that the Administration is on solid legal ground.

The controller’s letter, hand delivered to Huff’s office Tuesday, escalates what has been a running dispute between Davis, a potential Democratic gubernatorial candidate, and Gov. George Deukmejian over what Davis claims is the governor’s attempt to falsely portray himself as a good fiscal manager.

‘Larger Problem’

Davis, during an interview, said, “The Administration is manipulating its numbers in a way that diminishes the state’s credibility and may invite a larger problem in the future. All the governor need say is there is a problem and here is my solution. Instead, acting apparently out of misplaced pride, he is trying to mislead the public as to the true condition of the state’s finances.”

Deukmejian Press Secretary Kevin Brett said the Administration’s cancellation of the contracts is “perfectly appropriate” and was “well researched before it was taken.”

Brett also accused Davis of trying to “beat a dead horse to death” in the interests of furthering his gubernatorial ambitions.

“He obviously cares more about his gubernatorial aspirations then he does about the state’s AAA bond rating and its excellent fiscal reputation,” he said.

Like Huff, Brett said the state is operating in the black.

The budget Deukmejian introduced in January shows the state ending the 1987-88 fiscal year, during which there was a sharp drop-off in tax revenues believed caused by changes in federal tax law, with just $3.6 million in reserve.

The budget also anticipates that the state will end the current fiscal year with even less of a reserve, $3.2 million. But that could turn into a deficit as well if Davis is right, because the financial obligations for the prior year will carry forward into the current year.

Further complicating the budget picture is an accounting change incorporated in Deukmejian’s latest budget proposal that saves the state, at least on paper, $258 million by shifting special reserve funds forward from one budget year to the next. A staff report by the Commission on State Finance said that if the accounting change had not been made, the state would have ended 1987-88 with a deficit of $97 million.

Cancel Contracts

Huff concedes that the state could end the year with a deficit if he is unable to cancel the $80 million in contracts that still remain open from the 1987-88 fiscal year. The contracts are for major pieces of equipment and other items that still have not been delivered. Huff is confident that the money will be saved.

The finance director’s action ordering state departments to cancel the contracts came after Deukmejian Chief of Staff Michael R. Frost declared in a memo that it had become “apparent that a very substantial amount of funds have been encumbered and that the eventual liquidation of these obligations has not been accomplished in a timely manner.”

Davis, in his letter to Huff, advised the Deukmejian budget chief to withdraw his order or, at the very least, “consult with the attorney general’s office to develop reasonable guidelines as to which contracts may be canceled without the state incurring liability.”

“To do otherwise may result in substantial costs to the state,” he said.

Brett said the order will not be withdrawn.