Budget Cuts, Tax Hikes Agreed On : California: But funding for L.A. County prisons and automatic spending reductions divide governor and legislators. Democrats are balking on both issues.

Gov. George Deukmejian and legislative leaders, operating behind a wall of secrecy, tried Thursday to patch together a $50-billion-plus budget proposal based on sharply reduced payments to public employee pension systems, carefully targeted tax increases and a long list of cuts to health and welfare programs, sources said.

But while general agreement was reported early in the day on roughly $3.6 billion in spending reductions and tax increases, the governor and Democratic leaders were clearly at odds over at least two thorny issues: funding reauthorization for two proposed prisons in Los Angeles County and legislation requiring automatic spending reductions during off years when revenues don’t match legal demands on spending.

Democratic leaders said members of their party were balking at both demands being made by Deukmejian.

As to the tentative budget solution as a whole, the balance between revenue and expenses is achieved partially through a series of apparently tenuous devices including shifting funds around, delaying payments and reducing state contributions to pension funds on the promise they will be restored later.

After a meeting of Assembly Democrats where the package was outlined, Speaker Willie Brown described the reaction as not good, although he said he had not yet begun trying to round up votes for passage.

Brown met with Deukmejian and other legislative leaders twice Thursday. Draping a veil of secrecy around the talks, the lawmakers left the governor’s office by back doors so they could avoid reporters.

Contacted later, Senate President Pro Tem David A. Roberti (D-Los Angeles) said that despite their hasty departures from the governor’s office he thought the negotiators were “close to a proposal.”

Senate Republican Leader Ken Maddy of Fresno said there are “hang-ups on a lot of it but we’re hopeful.”

The Los Angeles prisons issue could be the hardest to resolve because it involves the opposition of legislators from both parties who represent the areas chosen as sites. One is near downtown Los Angeles and the other is in the Antelope Valley. Some lawmakers say they are willing to vote against the entire budget package if money for the prisons is in it.

Among them was Assemblywoman Lucille Roybal-Allard (D-Los Angeles), who said she will continue to fight to keep the prison money out of the budget and that Brown has been “very, very supportive” of her position. Asked if this was the case, Brown told a reporter: “Absolutely.”

The list of proposed cuts and tax increases began circulating in the Capitol while Deukmejian and four legislative leaders met again privately in the hopes of resolving an impasse that has left the state without a budget for 27 days.

The list contained many of the proposed spending reductions and tax and fee increases included in the $55-billion-plus spending plan approved by the Senate on July 10.

But there are some notable differences.

Faced with a gap of roughly $700 million to $800 million and the continued effort by Democrats to protect Proposition 98 funding guarantees to public schools, Deukmejian and the legislative negotiators reportedly decided to temporarily reduce payments to the State Teachers’ Retirement System by $500 million. In addition, they would “save” tens of millions through an accounting change that would place state contributions to the Public Employees’ Retirement System on a quarterly, rather than monthly, payment schedule.

Officials said the budget actions would not reduce benefits or pensions for retirees.

In exchange for reducing payments into the fund now to achieve immediate budget savings, 10 years from now the state would begin making increased contributions to more than make up the difference.

“Ultimately, in the long run, we think retired teachers will benefit. Given that, and the fact that it may solve the budget crisis and protect Proposition 98, we think it is a fair proposal,” said Patrick C. McCallum, a lobbyist for the Faculty Assn. of California Community Colleges.

Deukmejian also reportedly is insisting on imposing a first-ever sales tax on newspapers and periodicals, which would raise $40 million annually. The proposal would remove a historic exemption to the sales tax given newspapers and magazines, one of dozens of special exemptions granted over the years by the Legislature.

Originally, the Senate-approved spending plan would have removed sales tax exemptions on candy, motion pictures and advertising, in addition to newspapers. The entire package ran into trouble in the Assembly and was scrapped by Democrats in the lower house. Deukmejian, latching onto a proposal first made by Senate Republican Leader Ken Maddy of Fresno, reportedly has insisted on keeping the tax proposal for newspapers and magazines. Because the sales tax levy varies from county to county, the new tax on newspapers, magazines and periodicals would range from 6% to 7 1/2%.

Critics said the tax proposal is Deukmejian’s way of getting even with newspapers for all the criticism he has received from editorial writers on the budget problem, including complaints that he has not supported tax increases.

“It is political retribution for editorially expressing a point of view,” said Michael B. Dorais, a lobbyist for the California Newspaper Publishers Assn., who noted that there are numerous sales tax exemptions for various products. “Some of the largest newspapers in the state, including the Los Angeles Times, have suggested that new taxes be considered as part of the budget solution. It is clear that the governor does not want to let that pass unnoticed.”

Deukmejian spokesman Robert J. Gore denied that there was any special effort to penalize newspapers. “The search for revenue is mathematical. There is no other motivation,” Gore said.

The formula to automatically trigger cuts when revenues fall below a certain level is another tough issue. Deukmejian has been talking about it for months, but the proposal has gotten nowhere.

Basically, the governor’s idea is to put into place in California a mechanism similar to the federal government’s Gramm-Rudman budget-balancing law that automatically triggers spending cuts.

Initially, the governor proposed automatic cuts only for pension funds, counties, and health and welfare services. Discussions now would expand the proposal to include the University of California, the California State University system and the Department of Corrections.

Times staff writer Jerry Gillam contributed to this story.