BAY AREA QUAKE : State May Have Less Money in Reserve for Earthquake Aid

Elected officials putting together an earthquake relief package have been told they may have $470 million less to spend than they thought.

In its latest update on state revenue, the nonpartisan Commission on State Finance has reported to Gov. George Deukmejian and lawmakers that the state’s emergency budget reserve is only $674 million, well below the roughly $1.1 billion Deukmejian and legislative leaders had been counting on.

The commission’s figures will add to the pressure on the governor and Legislature to approve a temporary tax increase to pay for a financial aid and rebuilding program.

Damage estimates from the Oct. 17 earthquake already top $7 billion. The federal government has committed $3.45 billion to pay for part of the rebuilding effort. While private industry and homeowners--as well as local governments--will bear part of the burden, the final bill to the state is expected to be huge.

So far, no official estimates have been made of what the cost will be to the state. In addition to fulfilling a promise to provide financial aid to individuals who suffered losses in the Oct. 17 quake, Deukmejian and the Legislature will have to come up with hundreds of millions of dollars to repair state office buildings, highways and pay for relief efforts.

A report by the Senate Budget and Fiscal Review Committee obtained by The Times on Friday shows that the National Guard is spending an additional $90,000 a day providing earthquake assistance while the California Conservation Corps has about 480 members in the field at a cost of $50,000 a day. The California Division of Forestry estimates that it will spend $4 million to $5 million providing emergency services. On top of that, payrolls at the California Highway Patrol and Department of Transportation are said to be swelling because of heavy overtime costs.

The Department of Finance has already distributed $122 million to the seven counties hit hardest by the earthquake.

State officials had been counting on the reserve to provide a substantial share of funds for the earthquake relief effort, although many officeholders believe that a temporary tax increase may be necessary because Deukmejian has said he does not want to use up all of the standby funds.

The differences over the size of the reserve stem from conflicting interpretations of tax and government expenditure data assembled by the staffs of the Commission on State Finance and the Department of Finance, which has been putting the reserve at $1.1 billion. The commission believes Department of Finance tax revenue estimates are too high and its estimates of how much the state will spend during the current budget year are too low.

State Finance Director Jesse R. Huff, Deukmejian’s Cabinet-level budget adviser, conceded that the commission’s lower estimate of the budget reserve “could be in the ballpark.” But he said that for the time being he is sticking to his department’s $1.1 billion estimate while the Department of Finance reworks its own revenue estimates.

“We know that our figure may be on the high side because it does not take into account the legislation the governor signed last month. We still don’t have a total on that,” Huff said.

Report of the lower reserve figure comes at a time when state officials already are having difficulties with restrictions imposed on them by two voter-approved constitutional amendments.

One of the measures is the spending limit approved by voters in 1979. The last report by the Department of Finance showed that the $49-billion budget enacted in July brought the state to within $89 million of its spending limit, so a big financial aid plan would put the California budget over the top.

That initiative made a provision for emergency expenditures, but it requires that the money essentially be repaid within three years. That means lawmakers might be able to spend the money this year but could be forced to reduce funds for prisons, social services and other ongoing state programs by a like amount over the next three years.

The only other option is to win voter approval of a ballot measure amending the limit. The next state election is not scheduled until June, 1990. Already on that ballot is a 10-year, $18.5-billion transportation funding plan that would amend the spending limit to allow for unlimited emergency expenditures.

Assemblyman Richard Katz (D-Sylmar), chairman of the Assembly Transportation Committee, and other lawmakers would like Deukmejian to call a special election for a vote on the measure before next June, but Deukmejian is cool to the suggestion.

The other measure posing problems for the governor and lawmakers is Proposition 98, the landmark school funding initiative enacted by voters last year. The measure requires that public schools and community colleges receive at least 40% of general purpose state tax revenue. Thus, schools could be in line to receive an unexpected bonanza of 40% of any temporary sales or income tax increase.

The governor and Legislature can get around Proposition 98 by putting money from a temporary tax increase into a special fund. Special funds are exempt from the provisions of Proposition 98. But such a move would require a two-thirds vote of the Legislature.

State Supt. of Public Instruction Bill Honig told The Times that he would be willing to go along with a bill waiving Proposition 98 temporarily, but only after he is assured that schools are given enough to recoup their earthquake losses.

Honig estimates that schools in earthquake areas suffered from $50 million to $100 million in damage.

“We are not going to insist on our share (under Proposition 98). We just want to be treated as fairly as everyone else,” Honig said.

Deukmejian and legislative leaders are scheduled to meet Monday to discuss earthquake relief legislation and to set a timetable for bringing the Legislature back in special session to enact the package.

The state leaders are considering a variety of options, with most of the focus on some sort of temporary tax increase.

Sources said the governor and other Republicans are leaning toward a “standby” tax similar to a stopgap sales tax increase enacted in 1983 when the state faced a $1.5-billion budget deficit. That tax, which would have been triggered had state revenues continued their recession-caused down slide, never went into effect.

Deukmejian on Thursday told reporters in Los Angeles that he is leaning toward a temporary sales or income tax hike rather than an increase in the gasoline tax. The heaviest financial damage from the earthquake was caused to state roads, bridges and freeways, making the gasoline tax a natural target for a hike. But the California Constitution limits the expenditure of gasoline tax money to transportation-related projects, so it could not be used to assist victims or repair buildings.

“Most of the people in Sacramento that I have talked to seem to favor the sales tax,” the governor said.

On Friday, Senate President Pro Tem David A. Roberti (D-Los Angeles) and Assembly Republican Leader Ross Johnson of La Habra both said they favor using the sales tax to raise money for earthquake aid if a tax increase is needed. Their comments were made in Los Angeles during a taping of the KCBS Newsmakers show that will air Sunday.

The Commission on State Finance’s budget analysis, in another significant difference with the Department of Finance, says the state can spend an additional $400 million before bumping up against the ceiling--not the $89 million estimated by the Deukmejian Administration.

If the commission’s figures stand up, it means that the governor and Legislature could spend the $670 million in the reserve and another $400 million before hitting the limit.

But spending all the money in the reserve appears highly unlikely. For one thing, Deukmejian is worried that exhausting the reserve would leave the state with no money to fall back on if there is another disaster. For another, Deukmejian has made it clear in past years that he believes it is imprudent for the state to operate without at least a $1-billion reserve. Thus, he could be expected to rebuild the reserve next year by taking money away from other state programs.

Times staff writer Daniel M. Weintraub contributed to this story.