State’s Shortfall Now $3.6 Billion : Budget: Governor, legislative leaders will face decisions on spending cuts and tax increases. This is fourth straight year officials were wrong on revenue.

Gov. George Deukmejian, dishing out more bad news than anyone expected, announced Thursday that the state will be $3.6 billion short of what it will need to pay all of its bills and meet various legal and budgetary requirements for the new budget year that will begin on July 1.

The projected shortfall means that the governor and legislative leaders very likely will have to come up with some combination of budget cuts and tax increases to make up the difference.

The Republican governor blamed the problem on increased demands for services, disappointing tax collections and mandatory spending requirements that he contends are driving up costs faster than the taxes that pay for them.

Assembly Speaker Willie Brown (D-San Francisco) and Senate President Pro Tem David A. Roberti (D-Los Angeles) declared after a private briefing by the governor that “everything is on the table”--including consideration of a freeze on benefit increases for welfare recipients and the aged, blind and disabled.

Democrats had rejected Deukmejian-recommended cuts in aid to the poor when the governor proposed a $53.7-billion budget in January.

For his part, Deukmejian did not rule out measures that would bring in more revenue, although he still argues that tax increases will not solve the problem. Participants in the meeting said taxes were not discussed during Thursday’s session.

The governor and legislative leaders plan a series of meetings, mirroring on a smaller scale the budget summits now taking place in Washington.

Deukmejian even jokingly borrowed some of the rhetoric coming out of the federal budget meetings, evading questions about his position on taxes and other questions by saying: “The table is there. It’s open, it’s uncluttered and we’ll see what the participants want to put on the table.”

Assembly Republican Leader Ross Johnson of La Habra, who attended the briefing with Roberti and Brown, said: “Everyone’s sacred cows are coming home to roost.”

As for the magnitude of the budget problem, Roberti said: “I had every reason to believe that the news was bad, but this is staggering.”

The June 5 primary election seemed to cast a long shadow over Thursday’s developments.

The comments by Brown and Roberti that “everything is on the table” support the position of Democratic candidate for governor Dianne Feinstein, who has been sharply criticized in recent days by her primary election opponent, Atty. Gen. John K. Van de Kamp, for stating that cuts to the poor should be on the negotiating table. Feinstein, however, has said that “to the greatest extent possible, using a test of fairness, I will work to protect” benefits for the poor.

A cautious approach to discussion of tax increases also is believed to be related to the June vote on Proposition 111, the transportation measure that would gradually increase the tax on gasoline by 9 cents a gallon. With public opinion polls showing that voters are skittish about raising the gasoline tax, supporters of Proposition 111 have complained to officeholders that talk of increasing other taxes can only hurt the ballot measure.

Even if a political consensus on taxes develops, spending the new money would be complicated by restrictions imposed by the so-called Gann Limit on state spending. Until the reassessment of tax revenues announced by the governor, the state was less than $100 million under the limit--meaning any sizable increase would have bumped the state right up against the spending ceiling. But with reduced tax revenues, the governor and Legislature now will have at least $1.1 billion of spending room under the limit.

Proposition 111, in addition to raising money for new highway construction, would revise the Gann Limit. Estimates are that it would create nearly $1 billion in room for spending increases during the new budget year. Thus, if Proposition 111 does not pass, the Legislature and governor would have about $1.1 billion in room for new spending. But if it does, the capacity would be about $2 billion.

Deukmejian said the fact that he is not running for reelection this year may give him “some advantage” in fashioning a compromise. “Maybe I can take more heat than somebody else or somebody who might be looking to be elected to another office,” he said.

Figures released by the Department of Finance show that the state will end the current budget year June 30 just barely in the black, with a reserve of $86 million. It began the year with a reserve of $1.1 billion. A decline of $500 million to $600 million in tax revenue and a jump in aid to schools ate into the reserve.

Deukmejian, continuing to argue against a tax increase during a Capitol news conference, said that, even with the $3.6-billion shortfall, tax revenues next year will grow by a relatively healthy 7%--although that figure is down from the 8% revenue increase he was anticipating last week.

As he has in the past, Deukmejian blamed the budget problem on what he described as “artificial mandates and formulas that are built into the law that are now causing our budget to spiral out of control.”

Deukmejian complains that while tax revenues are rising by 7%, legally required spending is rising by 11%, pushed higher by cost-of-living adjustments, court orders, federal rules and voter-approved initiatives like Proposition 98, the school funding measure passed in 1988.

The governor argued that tax increases will not solve the budget problem in the long run until something is done to reduce the built-in spending escalators.

While he took pains to avoid setting his feet in concrete, Deukmejian reiterated that he wants consideration of a freeze in cost-of-living adjustments, which he said could save the state $1.7 billion in the new budget year.

When Deukmejian released his proposed budget in January, the anticipated shortfall was thought to be “only” about $1.7 billion. Since then, the budget problem has worsened by $1.8 billion, according to State Finance Director Jesse R. Huff.

Huff said tax receipts are down about $550 million in the current budget year in large part because of sluggishness in the economy. The finance director predicted that tax collections will continue to be less than originally expected, so he dropped revenue projections for the new budget year by $1.1 billion.

Huff’s annual revisions of budget revenues and expenditures have developed into major surprises for the governor and Legislature for four straight years. Four years ago, he revealed that the state was running up a $1.1-billion surplus. The following year, revenues were down by $1 billion. Last year at this time, the governor and Legislature saw a projected budget crisis evaporate in the face of an unanticipated $2-billion surge in revenues.

Huff said he has been vexed by changes in federal and state tax law and an unpredictable economy that he contends has fooled numerous other forecasters.

In addition to the revision of revenue estimates, Deukmejian also said he wants to rebuild the reserve fund and bring it up to $1.3 billion--roughly a third of the $3.6-billion shortfall.

“Any budget I sign is going to be a budget that is balanced, it’s going to have a prudent reserve for emergencies and it’s got to include some long-term budget reform,” Deukmejian said.