Wilson Names Finance Chief, Hints at Tax Hike : Budget: Defeated Treasurer Hayes is selected. Higher levies depend on fiscal reform, senator says.

With the state’s budget problems mounting almost daily, Gov.-elect Pete Wilson on Tuesday named defeated state Treasurer Thomas W. Hayes as his finance director and set the stage for a tax increase to cope with what he called California’s “fiscal emergency.”

Only hours after Wilson’s announcement, a state finance commission chaired by Hayes released a forecast projecting not only a deficit in the current budget year, but a potential shortfall of $4.3 billion for Wilson’s first full year in office--far greater than earlier estimates. That is the amount of new money needed to continue existing services for the next fiscal year and rebuild a $1.4-billion emergency reserve.

Wilson also expressed doubts that the Legislature would approve Gov. George Deukmejian’s proposal to cut $1 billion from this year’s budget. The governor-elect said that he and Hayes will begin immediately to draft their own plan to present to lawmakers on or before Jan. 7, when Wilson takes office.

“He knows, I think, where every nickel of state funds is spent; he knows how it is spent,” Wilson said of Hayes, who was the Legislature’s auditor general for 10 years before Deukmejian appointed him treasurer in late 1988. “His expertise and his character, I think, will go a very long way in helping us to deal with the very great challenges we do face.”

The Wilson team also will begin reviewing the Deukmejian Administration’s proposed budget for the next fiscal year, which begins July 1. Wilson will inherit that plan and is required to present his version of the proposal to the Legislature by Jan. 10.

Wilson said he does not think the voters are “in the mood” for new taxes, but he added that he will give “very, very careful consideration” to higher revenues. He indicated that he might accept a tax increase if the Democratic-controlled Legislature agrees to change laws that restrict the way state government spends the taxpayers’ dollars.

First, there must be “significant budget reform,” Wilson said. “That is going to involve cutting.”

Wilson would not specify what kinds of tax increases he would consider or define his version of “reform.” He hinted that he would like to dismantle some or all of the constraints that voters and past Legislatures have placed on the budget process. During the campaign, Wilson suggested suspending or repealing Proposition 98, the voter-approved constitutional provision that guarantees schools about 40% of the state budget.

“There probably is a fiscal emergency,” Wilson said. “If we don’t achieve reforms, we will be faced with doing some (program cuts) that will be politically repugnant for everyone.”

In making Hayes his first major appointment as governor-elect, Wilson confirmed speculation that his Administration will include a few familiar faces from the Deukmejian years. At the same time, in Hayes he has chosen a moderate, career public servant with close ties to the Legislature.

Finance director is probably the most important job Wilson will fill in his Administration, next to his chief of staff. Hayes will help his new boss set priorities for taxes and spending and make decisions that will spill over into health and welfare, education, environmental policy and other crucial areas.

Hayes, 44, replaced longtime Treasurer Jesse M. Unruh, who died in office. As treasurer, Hayes has been responsible for the state’s $20-billion investment portfolio and has served on more than 40 boards and commissions dealing with state financial management.

A soft-spoken Marine Corps veteran, Hayes was never politically active before becoming treasurer. He registered with a political party--the Republicans--for the first time in his life in order to seek election to the job in his own right. Hayes lost that race to Democrat Kathleen Brown, with whom he will now have to work occasionally in his new job.

Wilson also named two of Hayes’ deputies at the treasurer’s office--Susanne Burton and Russell Gould--to assist him at the Finance Department.

Hayes sent Gould to represent him at Tuesday’s meeting of the Commission on State Finance, the seven-member panel that issued its pessimistic forecast on the budget. Even though a shortfall in next year’s budget was expected, the size of the gap seemed to surprise some government officials.

Controller Gray Davis, a member of the commission, said the magnitude of the problem is so great that Wilson and the Legislature should consider a two- or three-year budget solution, which could involve carrying over a deficit from one year to the next.

“The size of the structural budget imbalance is staggering,” said Davis, who did not attend the commission meeting.

The commission’s report showed that the state will exhaust its budget reserve and be at least $30 million in the red by the end of the 1989-90 fiscal year if the Legislature does not act to remedy the situation.

Gail Greer Lyle, executive secretary of the commission, said the impending shortfall stems from lower than expected tax collections because of the downturn in the economy, and increased demands for state government services, particularly schools, prisons, health and welfare programs and money to service the state’s growing debt.

The $4.3-billion figure corresponds to the $3.6-billion shortfall the governor and Legislature wrestled with for most of last summer before settling on a combination of tax increases and budget cuts.

Past budget practices appear to be coming back to haunt state officials. Last summer, Deukmejian and legislators agreed to defer payments to the state employees pension funds as part of the deal to close the $3.6-billion gap. Next year, state officials will have to come up with an additional $665-million pension payment. Principal and interest on the state’s soaring debt load will require an additional $520 million, according to the commission’s report.

The report showed that over the next 10 years, revenue growth will average about 7.5% while spending demands will increase by 8.1%, a disparity that, if uncorrected, would produce shortfalls every year.

Changes in the law to correct the imbalance can occur by increasing revenues or by reducing expenditures.

Wilson was not specific on what he will propose. Whatever approach he takes, he is likely to face an uphill fight.

Republicans in the Legislature have generally attacked the problem from the expenditure side, believing the best way to correct the imbalance is by reducing allotments to health and welfare programs or curtailing spending in other areas.

Democrats have successfully fought such proposals, preferring instead to tackle the problem by boosting taxes. They argue that Californians during the 1970s and 1980s saw their tax burden reduced by tens of billions through measures such as Proposition 13 property tax cuts and reductions in the income tax.

Democrats have been pressing for several years to return the top state income tax rate to 11%. It was dropped to 9.3% several years ago in a tax reform bill.