Agreement Is Reported Near on State Budget

Signaling rare progress on snarled budget negotiations, legislative leaders reported Wednesday that the state spending gap that once stood at $3.6 billion has been narrowed to from $700 million to $800 million.

Lawmakers emerged from a private, two-hour meeting with Gov. George Deukmejian saying that an overall budget agreement could come as early as today. The development came as state government limped through its 25th day without a budget.

No details of the agreement were released, but both Democrats and Republicans agreed that “significant progress” had been made and all the pieces were in place for a settlement.

Assembly Speaker Willie Brown (D-San Francisco) said, “There is about a $700-million or $800-million gap and that is what we are looking at.”

Although the lawmakers said no firm agreements had been made on a total package, it was understood that Deukmejian now had resigned himself to accepting parts of a major package of tax and fee increases while Democrats seemed to be willing to discuss even deeper spending reductions than the already agreed upon $1.7 billion.

Deukmejian has argued vehemently in the past that the $3.6-billion budget gap--the difference between tax revenues the state is expected to take in this year and the cost of maintaining state services and rebuilding the depleted $1.3-billion budget reserve--could be closed entirely by budget cuts. Although he at times appeared to be leaving the door open to tax and fee increases, his intransigence on the question is considered a major factor in the lengthy political impasse that has blocked passage of the budget.

Speaker Brown--who appeared at a news conference with Senate President Pro Tem David A. Roberti (D-Los Angeles), Senate Republican Leader Ken Maddy of Fresno and Assembly GOP Leader Ross Johnson of La Habra--summed up the mood of the negotiators this way: “I think everyone has said there must be structural reforms, there must be significant cuts, and there must be some revenue production.”

A spokesman for Deukmejian, Press Secretary Robert J. Gore, said he had no quarrel with Brown’s assessment but refused to discuss details. “The pieces are all there and they haven’t been fit together yet, so it is impossible to comment on what kind of whole emerges.”

Meanwhile, fiscal experts continued struggling with a treasury running dry Wednesday as they shifted funds to meet mounting debts and prepared to borrow $1 billion at premium interest rates as soon as the budget crisis is solved.

Controller Gray Davis and Treasurer Thomas J. Hayes reported that in a search to squeeze every conceivable source for extra cash, they found a school construction cookie jar containing $217 million that could be loaned to the nearly empty treasury.

Davis indicated that together with existing resources, the loan could be made available for meeting the end-of-month $500-million state labor force payroll or for other payments that courts may order.

Once the immediate crisis is past and a new budget is in place, Hayes said, the emergency $1-billion loan will be necessary “in all likelihood” to quickly pay overdue bills and help replenish a battered treasury. A budget must be enacted before the state can either spend or borrow money.

Because funds will be needed very quickly once a budget is approved, Hayes told The Times, he now has no choice but to issue taxable notes that carry significantly higher interest rates than the tax-exempt instruments usually issued by the treasurer.

Saying he regretted the extra expense, Hayes said that nonetheless, “We are fully equipped and ready to do that.” He estimated the interest rate at 8% to 8.5% compared to 6% for the tax-free fiscal instruments.

An assistant to Hayes, Russ Gould, said a single day’s interest on a $1-billion loan at 8.5% would total $236,000 compared to $166,000 a day at 6% interest.

Gould said, however, that the higher-rate loan probably would be in effect for only a couple of days to cover the urgent payments from the treasury and that the loan would be paid off and converted into a tax-exempt note at 6%.

Even in the best of fiscal times, the state borrows money from outside lenders a month or so after the budget is enacted because expenses rise and revenues fall during July. Routinely, the state issues tax-exempt “revenue anticipation notes” at about 6% interest to fill the gap.

The emergency $1-billion loan this time, said Hayes and Davis, is made necessary by the extraordinarily long delay in enacting a state budget. Both said the usual revenue anticipation note loans of about $3.5 billion still will be made.

Hayes, just back from consultations on Wall Street, again warned Deukmejian and legislative leaders that further delay in enacting a state budget threatens to jeopardize California’s platinum-plated credit rating and could cost taxpayers additional millions “next year and for years to come.”

In a letter, Hayes said that all three Eastern financial houses that rate California bonds are “uneasy” about the long budget hiatus and “the longer we delay, the higher the probability of an adverse action on their part.”

The three rating houses, Standard and Poors, Moodys and Fitch, have rated California’s credit at the highest level, or AAA. Any downgrading of the rating would add interest costs to the state’s borrowing.

Hayes called on the lawmakers and Deukmejian to enact a budget “as quickly as possible and demonstrate the fact that we continue to be fiscally responsible.”

Also Wednesday, the fiscal squeeze for state agencies got a little tighter when the Department of Finance warned that it is illegal to use departmental revolving funds to pay for operating expenses during the budget stalemate, according to a memorandum obtained by The Times.

Officials at several state departments said the funds were their last resort to pay for travel, equipment and other day-to-day expenses.

The revolving funds were terminated by a terse internal memorandum issued by the Finance Department. “Budget analysts should contact their departments to remind them it is illegal to write (revolving fund) checks for current year expenditures during this time without a budget. We believe many agencies are continuing to illegally write (revolving fund) checks,” the memo said.

Even though the Legislature has not appropriated any money for the new fiscal year, many agencies continued to use money left over in their revolving funds from the previous fiscal year, which ended June 30.

The Justice Department, for example, has $200,000 left over in the fund, a department spokeswoman said. The Department of Social Services has $1 million, which it was using for such expenses as sending inspectors to investigate complaints about community care facilities, employee training seminars and salary advances, said spokeswoman Kathleen Norris.

The Department of Health Services had $4 million left over at the beginning of July. Its fund is down to $800,000 after the department spent $410,000 on Monday to mail eligibility cards to thousands of Medi-Cal recipients.

“That was our last source of funds and with the latest interpretation of the law from Finance we can’t even spend that money,” said spokesman Norman S. Hartman. “Those people who travel frequently and expect to get reimbursed are no longer going to be able to do so.”

Times staff writer Max Boot contributed to this article.