$1-Billion Austerity Plan Urged as State Revenues Dive : Budget: The governor’s proposal includes cuts in voter-approved guarantees for schools and a hiring freeze.

With state tax revenues falling far below expected levels, Gov. George Deukmejian on Thursday proposed an instant $1-billion austerity program in California that would include the suspension of voter-approved guarantees for schools.

Deukmejian’s surprise announcement put a damper on what had been expected to be a congenial meeting with Gov.-elect Pete Wilson to begin the transfer of power leading to Wilson’s swearing-in on Jan. 7.

In addition to cutting school funding by $526 million, Deukmejian’s plan would freeze state hiring, cut all state budgets except higher education by 1%, and reduce the renters’ tax credit. Most of the plan would have to be approved by the Legislature, which earlier this year rejected Deukmejian’s attempt to suspend Proposition 98’s requirement that about 40% of the budget go to schools.

The governor ruled out any tax increase, saying that voters on Nov. 6 made it “plainly clear” by rejecting several expensive ballot measures that they “don’t want to pay higher taxes.”

Deukmejian said he and his top fiscal aides briefed Wilson on the problem during a luncheon and three-hour meeting Thursday afternoon. The governor-elect spoke briefly with reporters before leaving the Capitol but addressed the budget only in generalities, deferring to Deukmejian whenever pressed to comment on the potential deficit.

Deukmejian told reporters that Wilson believes the current Administration should resolve the budget crisis.

“He did indicate to me he thought it was very prudent of me to make a proposal now to try to get on top of this new developing situation just as quickly as possible,” Deukmejian said of Wilson.

The proposal to cut school money drew a sharp reply from state schools Supt. Bill Honig, who has battled Deukmejian over the education budget for several years. Honig said many of the state’s school districts are in bad fiscal condition and can ill afford budget cuts halfway through the academic year.

“It’s not surprising,” Honig said of the proposal. “Deukmejian has been against education consistently. I suppose with his last breath in office he’ll keep trying to take money away from school kids.”

The dire budget situation became clear Thursday when the legislative analyst’s office reported that tax collections during October dropped a whopping $250 million because of the downturn in the economy. When revenue shortfalls in July, August and September are added in, it means that state officials now are short by $408 million.

“It is too early to hit the panic button, but there definitely are some problems, some black clouds on the horizon,” said Elizabeth G. Hill, the nonpartisan legislative analyst.

The day began with a cordial luncheon meeting between Deukmejian and Wilson, the first for the two Republican leaders since the Nov. 6 election.

For a while, at least, the budget problems were set aside when Deukmejian and Wilson got together for their first face-to-face meeting since the Nov. 6 election.

“I couldn’t be any happier,” said a smiling Deukmejian, noting it has been 36 years since governors from the same party served consecutively. Gov. Goodwin J. Knight, formerly lieutenant governor, succeeded fellow Republican Earl Warren in 1953 when Warren was appointed chief justice of the U.S. Supreme Court.

When Deukmejian took office, the state faced a $1.5-billion shortfall and he has said he would not leave his successor with a similar budget problem. Deukmejian until Thursday had contended that despite the drop-off in revenues the state would finish this year in the black.

As for the report from budget analyst Hill, it showed that the largest decline has been in the sales tax, which is down $168 million over the last four months. Personal income tax collections are off $111 million, followed by bank and corporation tax receipts, off $92 million. Various other tax collections are down a total of $37 million.

The hard numbers released Thursday come on top of earlier estimates from Hill that the state will be $1.1 billion short of what it will need during the next budget year to provide state services.

The October drop must be added to the $1.1-billion estimate because the two figures combined represent a shortfall that Wilson will have to deal with both to get through the current budget year and to prepare his first budget as governor.

What’s more, the problem could get larger in the coming months if the economy does not improve. October is one of the lowest revenue-producing months. Almost twice as much money comes in during December, reflecting the Christmas shopping season, and nearly three times as much in April, when income taxes are due.

Times staff writer William Trombley contributed to this story.