Like Problem He Inherited From Brown : Deukmejian Could Leave Chaotic Budget Situation

Unless things change, Gov. George Deukmejian could leave his successor the same kind of chaotic budget situation that he inherited from ex-Gov. Edmund G. Brown Jr. in 1983, according to legislative fiscal experts.

Democrat Brown left California’s state government broke, facing a $1.5-billion budget deficit and on the brink of issuing IOUs because there was no money in the Treasury.

Things are not that bad yet, and Deukmejian still has nearly two years to go before he leaves office. But the outlook is grim, particularly so for a Republican governor who sold himself to the voters as a hard-headed fiscal conservative who could be counted on to steer the state away from the brink of fiscal crisis.

Many budget experts say the state is in its worst financial shape since the deficit year of 1983 as it continues struggling to make up for an unexpected $1-billion drop-off in tax revenues last year due to the spinoff effects of a 1986 change in federal tax laws. Three top budget analysts said the state already has a deficit that Deukmejian will not acknowledge.

In an unusual move, Administration officials last month ordered cancellation of all state contracts, purchase orders and other financial commitments still open from the previous fiscal year. The action could save the Administration from having to show a deficit. They also adopted a new accounting method that critics say makes the state’s books look better than they are.

At the same time, Deukmejian has given the Legislature a proposed $47.8-billion budget that will work only if the Legislature passes about a dozen separate bills, most of them highly controversial.

The bills would halt legally required increases in food and rent supplements for welfare recipients, suspend a $164-million payment to the State Teachers’ Retirement System, eliminate entirely the $36-million-a-year Family Planning Program, and even sanction the late payment of bills owed doctors and hospitals that provide Medi-Cal services to the poor.

Assembly Speaker Willie Brown (D-San Francisco) said he considers the budget unworkable. Brown complained this week to a group of Times reporters that Deukmejian “has dumped the budget process in the hands of the Legislature. He has not addressed effectively the budget problems in this state.”

If all that sounds vaguely familiar, it should. Ex-Gov. Brown, before he left office, was criticized for using what legislators called “smoke and mirrors” to patch together his last two budgets and keep them balanced--at least until he left office.

Opposed to Tax Boost

Like Deukmejian, Brown was strongly opposed to a tax increase. So, in an effort to keep the budget in balance, public schools and welfare recipients went without legally mandated cost-of-living increases, capital construction projects were halted, and money was borrowed and shifted from one account to another to keep the state afloat. Even so, when the state was hit hard by a recession in 1982, Brown’s overly optimistic revenue projections did not pan out and the result was a huge deficit.

Sen. Alfred E. Alquist (D-San Jose), veteran chairman of the Senate Budget and Fiscal Review Committee, who has served under both governors, said he does not “see a bit of difference” between some of the moves Brown made and some of those Deukmejian is making now. “The governor is playing all sorts of games,” Alquist said.

In defense of Deukmejian’s budget, state Finance Director Jesse R. Huff denied that the governor is using tricks. Huff calls the proposed spending plan “a reality budget” that reflects the tight restrictions Deukmejian is forced to work under.

Among the restrictions is a voter-approved spending limit, which officials say has made it impossible for the state to cover the costs associated with rapidly rising school enrollments, increased caseloads in health and welfare programs and the swelling prison population. Other problems hamstringing the governor, Huff said, are laws requiring that the state provide annual cost-of-living increases to welfare recipients and various health and welfare programs. Last November, voters approved Proposition 98, requiring that public schools and community colleges be given 40% of the next year’s state general fund budget of $38 billion.

“We are doing everything we can to manage our way through this,” Huff said.

Seeking ‘Reforms’

Deukmejian has been holding private talks with legislative leaders in an effort to reach agreement on “reforms” that would give the chief executive more freedom in budgeting. But so far, the talks have not led to any concrete proposals.

At this point, the governor’s budget shows that the state is only barely in the black. And the Administration even gets an argument on that.

Administration officials say the state finished the fiscal year that ended last June 30 with only $4 million to spare. During the current fiscal year, the reserve remaining after an estimated $45 billion is spent is expected to be even less, $3.2 million. That means that there is such a narrow margin between revenues and expenditures that even a slight downturn in the economy could erase the small reserve and create a deficit.

Other state officials responsible for monitoring budget figures say the deficit already exists. State Controller Gray Davis said the deficit in last year’s budget was $343 million. Legislative Analyst Elizabeth G. Hill said it was $200 million. And Treasurer Thomas W. Hayes--who was nominated to his job by Deukmejian--puts the deficit figure at $97 million.

Huff stands by his budget estimates. “I have seen nothing yet that would indicate to me that our numbers are wrong,” he said during a recent interview.

Close to the Edge

Deukmejian’s budget is so close to the edge that the Treasury does not even have $24.6 million to provide emergency funding for a deficit in the Department of Developmental Services budget. A bipartisan bill to appropriate the additional funds, carried by a Republican legislator, now awaits action on the Assembly floor. If the money cannot be found, the state may close 21 regional service centers for the developmentally disabled.

On Thursday, the Administration proposed a complicated plan to borrow the funds from a surplus in the state Contractor’s License Fund and then repay the money on July 15 from next year’s state budget.

But Assemblyman John Vasconcellos (D-Santa Clara), the Ways and Means Committee chairman, rejected the plan. “We simply cannot begin borrowing against next year, from totally unrelated funds, to balance a budget that is structurally flawed. . . . We must draw the line somewhere,” Vasconcellos said.

Sen. John Seymour of Anaheim, the GOP legislator who drafted the bill to provide the emergency funding, said: “It’s embarrassing for a state with a $45-billion budget to be unable to come up with $25 million.”

Vasconcellos said he has seen some of the same budget moves Deukmejian now is making during previous administrations. The legislator said that budgets by lame-duck governors are characterized by efforts “to delay everything they can” and “gimmick it up as much as possible.”

Alquist, Vasconcellos and many other Democrats believe that the budget problems could be solved by raising taxes, something Deukmejian has steadfastly refused to do.

“The major problem is that we are short of money,” said Vasconcellos, who is critical of Deukmejian for dropping a proposal the governor made last year that would have brought in hundreds of millions in new tax revenues. Deukmejian introduced the plan after tax receipts dropped by more than $1 billion, after the 1986 change in federal tax laws. The governor dropped the plan when he could not find legislative support.

Huff insisted that the problem is not a shortage of money, but an inflexible system that ties the governor’s hands. In fact, even if Deukmejian wanted to, he could not raise taxes and spend the revenues under the state’s current expenditure limit.

“Because of the restrictions that built up over time, we are not able to allocate financial resources the way we want,” Huff said.

Legislative Analyst Hill expects the problem to continue. “As difficult as this budget is, all indications are that next year’s budget will be even worse,” she told legislators last week.