State Budget Deal Raises Taxes, Fees by $850 Million : Impasse: Agreement between Deukmejian and legislative leaders calls for $2.3 billion in spending cuts. But passage is not assured as the Legislature balks.

Prolonged budget negotiations between Gov. George Deukmejian and legislative leaders came to an end Friday with an agreement that calls for roughly $2.3 billion in spending cuts, nearly $850 million in tax and fee increases and enactment of legislation giving governors broad new authority to make budget cuts in future years.

But passage of the agreement, which came on the 27th day the state had operated without a budget, is not assured.

Both the Senate and the Assembly met Friday evening to consider the spending and tax package, contained in at least 20 separate bills. The Senate adjourned without action and is to reconvene today. The Assembly met into the night, with Republicans saying they found the tax increases hard to swallow.

According to the agreement reached between Deukmejian and the Legislature’s four top leaders, most of the cuts will be contained in legislation now before the Legislature; Deukmejian is expected to trim an estimated $400 million with his line-item veto.

Among the political difficulties is the governor’s insistence on freeing state funds to construct two Los Angeles County prisons.

Deukmejian, even as he joined legislative negotiators in announcing the agreement, vowed that he would not sign the $55-billion state budget unless the Los Angeles County prison construction legislation was approved.

But Assembly Speaker Willie Brown (D-San Francisco) said he would support Los Angeles Democrats in opposing the measure. One potential problem was eliminated when negotiators decided to put the prison question in a separate bill requiring only a 41-vote majority in the Assembly, making it easier to win approval for construction. If it had been in the main budget bill, it would have required 54 votes, or a two-thirds majority, in order to pass.

Assemblywoman Lucille Roybal-Allard (D-Los Angeles) accused Deukmejian of “blackmailing the Legislature” into voting for the prison by linking the issue to the budget.

Deukmejian, in forging the agreement, yielded to Democrats on tax and fee increases and failed in efforts to cut public school spending. Initially, Deukmejian had insisted that the entire $3.6-billion gap between what the state expects to take in this year and projected budget expenditures could be bridged through spending reductions. One of his proposals was an $800-million cut in public schools funds, almost exactly the amount of the tax and fee package.

But the Republican governor received support for an automatic spending reduction formula that can be used in coming years to avoid prolonged stalemates. It would give future governors the authority to make up to 4% in cuts in most state programs, including those now protected by law, whenever projected expenditures exceed revenues by at least one-half of 1%.

Announcing the agreement at a Capitol news conference, Deukmejian said the so-called “trigger” mechanism, had it been in place this year, would have given him far more flexibility in dealing with a gap of roughly $3.6 billion between revenues and projected state operating expenses.

“Hopefully, (future governors and legislatures) won’t be faced with it, but in the event that they are they will have more flexibility than we have had,” Deukmejian said.

In a late development, negotiators dropped a proposal initially supported by Deukmejian that would have imposed the first-ever sales tax on newspapers and periodicals. Only 15 states currently tax newspapers, and newspaper executives from throughout the state had contacted their local legislators to stop the levy in California.

Publishers argued that there was no comparable tax on broadcasters, that the tax would raise little of the money needed to close the looming budget deficit, and that the effect of the tax would hurt the flow of information.

They also noted that more than $5.5 billion in sales tax exemptions are currently on the books and that removal of the newspaper and magazine exemption was the only one still being considered in the final stages of the budget negotiations.

Among those arguing against the tax was Los Angeles Times Publisher and Chief Executive Officer David Laventhol, who called Senate President Pro Tem David A. Roberti (D-Los Angeles) on Thursday. “I called Roberti just to reiterate . . . (that) we thought the tax was not a good thing, that it hurts newspapers, particularly small newspapers and that the legislation shouldn’t pass.”

Laventhol said Roberti made no commitment except to say: “I hear you.”

Senate Republican Leader Ken Maddy of Fresno had supported the tax, pointing to the inconsistency of current law, which taxes books but not magazines. “It’s ludicrous that you can buy Playboy without paying a tax, but if you buy a Bible there is no way to avoid it.”

But Maddy said he backed down when the governor insisted that there be no increase in sales taxes or income taxes.

Deukmejian downplayed the tax and fee package, noting that it does not raise sales, income or other general taxes.

“There will be some raises in revenues, which I am sure all of you in the press corps will call taxes, so I won’t try to tell you not to call them taxes,” he said.

The biggest piece in the tax package would generate roughly $560 million a year in extra money for the state treasury by bringing state tax codes in line with changes in federal tax law enacted since 1987. The proposal contains numerous changes in accounting rules and tax laws, most of which affect corporations and partnerships by tightening up allowances and credits for such things as business lunches, pension fund earnings and corporate dividends.

Various fee increases would raise entrance charges at state parks, boost the amount both in-state and out-of-state students pay to attend the University of California and Cal State schools, and tack a surcharge on vehicles being registered in California by persons moving here from other states. Fee increases would also hit water companies; new assessments would be levied against people living in areas protected by the state fire service, and there would be an increase in charges for copies of vital records.

In addition to the tax and fee proposals, the budget negotiators agreed to reduce contributions to state public employee pension

funds by roughly $700 million. The biggest reduction will be in contributions withheld to the $33-billion State Teachers’ Retirement System pension fund, saving the state $477 million this year but requiring escalating payments in future years. One lawmaker described the change as a “refinancing of the pension debt.” Officials said pensioners will continue to receive all the benefits due them.

Hardest hit by the proposed cuts will be health and welfare programs.

Payments to welfare recipients and aged, blind and disabled people would be frozen at current levels, meaning those people will be denied increases they were due to receive to defray the effects of inflation.

Payments to counties to help defray the costs of trial courts and health programs will be reduced 10%--a reduction of about $40 million from the amount they received this year. The negotiators also reduced $13 million in financial aid given to counties for the legal defense of indigents. Various state programs will be cut from 1% to 5%, with the amount varying from department to department.

Deukmejian said that despite the cuts, the portion of the budget going to meet daily operating expenses--including support for public schools and state-supported universities--will grow by 7.6% under the plan. That is about $3 billion more than last year. The budget plan also contains a $1.3-billion reserve.

Many of the proposals for spending reductions will be contained in individual bills. Deukmejian said he expects to veto about $1 billion from the main budget bill once the Legislature approves it.

The governor said public schools will receive all the funding they are guaranteed under Proposition 98, the voter-approved initiative of 1988 that will give schools about 42% of general state tax revenues during the 1990-91 fiscal year.

The budget negotiations were conducted against the backdrop of increasing legal and financial pressure. The only bills that have been paid since July 1, the start of the 1990-91 fiscal year, are those the state has had to pay under the threat of court order. California Department of Transportation workers and legislative employees, more than 5,000 in all, missed a payday July 13. The largest state payroll, covering about 190,000 employees, is due July 31 and none of the paychecks will go out without a budget. But Controller Gray Davis said the checks will be on time if the Legislature approves a budget by Sunday night.

The mounting pressure took its toll, according to all parties.

Deukmejian, during his first news conference since the intense discussions began, conceded that “a lot of people’s lives have been disrupted” as a result of the budget impasse.

But, he said, the budget problem this year was unique because of its magnitude and was characterized by “major philosophical differences” between the Republican governor and the Democrat-controlled Legislature.

Neither Democrats nor Republicans seemed to be pleased with the agreement.

Assemblyman John Vasconcellos (D-Santa Clara), chairman of the Assembly’s budget-writing committee, said he was kept in the dark by the negotiators. “We have a governor who thinks he’s Pope and only talks to cardinals,” Vasconcellos said.

On the Republican side, Assemblyman William P. Baker of Danville, a leading GOP budget negotiator who stayed close to the talks between the governor and legislative leaders, said he was not pleased with the reduction in pension payments, which he said were being “ripped off.”

“We borrowed substantially from the retirement funds based on promises to pay it back later,” he said. But Baker indicated he would vote reluctantly to go along with the package. “We ran out of time.”

Times staff writers Max Boot, Jerry Gillam and Carl Ingram contributed to this story.

HIGHLIGHTS OF THE BUDGET DEAL

The state faced a $3.6-billion gap between revenues and expenditures this year in a total budget of $55 billion. During the last two days, Gov. George Deukmejian and legislative leaders have agreed on roughly $2.3 billion in cuts and $850 million in tax and fee increases to close that deficit. Half of the cuts will be enacted by the Legislature; the governor is expected to use his line-item veto authority for the rest. Here are the highlights: Automatic Spending Cuts

In the future, if state expenditures are projected to exceed revenues by at least 0.5%, that will trigger automatic, across-the-board spending cuts of 4% except for programs, such as education, that have constitutional spending protections. The cuts could be triggered only if the director of finance and the bipartisan Commission on State Finance agree to make them. Taxes

About $560 million a year would be raised by making the state tax code conform with changes in federal law since 1987 by tightening allowances and credits for such things as business lunches, pension-fund earnings and corporate dividends.

A plan was dropped to impose the sales tax on newspapers and periodicals. Fees

Approximately $75 million would be raised by imposing a $300 one-time fee on out-of-state vehicles that are registered for the first time in California, and $10.6 million would come from increasing non-resident student tuition at the University of California by $617 and at California state universities by $500. Cost-of-Living Adjustments

A savings of $259 million would be realized by suspending automatic cost-of-living increases, expected to be 4.6%, for Medi-Cal and welfare recipients and in-home care workers. A family of three, instead of receiving a $32-per-month increase, would receive only the present $726. Another $60.7 million would be saved by suspending the cost-of-living adjustment for trial court funding. Pension Funds

Reducing the state’s contribution to three large pension funds--Public Employees Retirement System, the state Teachers Retirement System, and the UC Retirement System--would gain the state $700 million. The amount would be made up by increased contributions in the future. Pensioners are assured no interruption in benefit checks. Education

A savings of $68 million is forecast by redefining the way average daily attendance at local schools is calculated and reducing state funds accordingly. The governor dropped a plan to reduce the 42% of the budget that schools will get as a result of Proposition 98. Education spending will grow by 4.7%