NEWS ANALYSIS : Seeds of State Deficit Were Sown Over Years : Budget: Lack of political will, voter mandates and too-rosy revenue projections fueled current problems.

To taxpayers, it must seem that California went to bed one night and woke up the next morning facing a $12.6-billion state budget deficit.

The fact is, it took years--and a lot of procrastination and political games--to bring the state to a point where a new Republican governor felt compelled to propose $6.7 billion in higher taxes to bail out a $56-billion state budget that is drowning in red ink.

Interviews with budget experts, lawmakers and Administration officials past and present paint a picture of a government structure driven by short-term solutions--sometimes just enough to get through the next election--with less regard for the serious problems looming around the corner.

The Legislature and two former governors, Democrat Edmund G. Brown Jr. and Republican George Deukmejian, made promises to support schools, local governments and other programs that the state cannot keep. They handed out generous tax cuts at the same time they were approving policies fueling spectacular growth in medical care for the poor, welfare benefits and the prison program.

Voters also had a hand in creating the problems, slashing a basic source of government revenue by approving Proposition 13 and other measures that set aside a growing amount of taxpayers’ money for education and other specific programs.

Lawmakers complain that the state’s budget mess is due in large part to California’s dramatic population growth, fueled by Asian and Hispanic immigrants, and the resulting pressure on education, health and welfare programs. While there is evidence this contributed to the problem, many of the same Democrats who control the Legislature wrote the laws, created the formulas and assembled piece by piece the powertrain that is driving the budget machine.

When it came time to make hard decisions, marathon negotiating sessions all too often ended with important financial decisions being delayed or put off entirely. At such times, experts say, state officeholders planted fiscal time bombs by using accounting gimmicks, borrowing from pension plans, selling bonds in record numbers and adopting various “smoke and mirrors” tricks that made it seem like the state had balanced budgets when, in fact, the budgets were balanced only on paper.

Wilson bristles at critics in the Legislature who call his budget “heartless” because of the tough cuts he is proposing in welfare and other social programs. Wilson, a former Marine, told reporters this week: “What I think is heartless is to not have the guts to face the reality that this state has been papering over a deficit for many years and continued to fail to address it.”

By waiting so long, Wilson said he is now forced to ask Californians to swallow a heavy dose of medicine, a 1 1/4-cent sales tax increase, a variety of other new and higher levies and $4.8 billion in spending cuts.

The problem with papering over budget problems is that the bills coming due and the tax collections being taken in are paid or banked in hard cash. When the budget year ends June 30, the state will be short an estimated $3.6 billion in the cash needed to pay its bills. In other words, the state has been spending $300 million a month more than it has been taking in.

In large part, officials blame the recession, which has depressed tax revenues and created extra demands for health and welfare benefits. But the deficit is also because of the refusal of the Legislature to tackle the problem. In fact, the seeds for the budget problems that sprouted last summer were planted as long as three years ago.

Controller Gray Davis had been sounding the warning for several years, and was largely ignored. He reported that the state ran up deficits two of the last three years, beginning in 1987-88. During this period, Deukmejian consistently reported surpluses. Administration officials explained away the problem as differences in accounting methods and got a bill approved by the Legislature redefining what a deficit was, in part to shut Davis up.

The problem that had been building got out of control last year, when Deukmejian and the Legislature were faced with the threat of a $3.6-billion budget deficit. After months of contentious wrangling, the governor and lawmakers put together what was characterized as a balanced budget signed a record 31 days after the start of the fiscal year.

But that budget plan for 1990-91 was balanced by such things as deferring $600 million in pension obligations and the adoption of rosy assumptions about revenues that proved faulty when the recession deepened.

Less than three months after it was adopted last July, the state spending plan was $400 million short of the revenues needed to finance it. By December, the projected revenue gap had grown to $4.3 billion when extended through the fiscal year ending June 30, 1992.

Deukmejian pleaded with the Legislature to adopt an emergency $1-billion budget reduction plan to head off the problem. This included a 1% across-the-board cut in state services. The lame-duck governor was ignored.

By the time Wilson took office and drafted his budget, the potential deficit had grown to $7 billion. Wilson urged the Legislature to act quickly to head off the problem, presenting lawmakers with a package of tax increases and budget cuts. As with Deukmejian, Wilson’s pleas for early action went unheeded.

“Over a period of years, we’ve just been slipping behind steadily,” said A. Alan Post, a former legislative analyst who retired in 1977 after serving as the Legislature’s chief budget adviser for 27 years and who has been watching on the sidelines ever since.

Post and others say the current budget problems stem from that historic day in June, 1978, when voters passed Proposition 13. That landmark initiative cut local property taxes by more than half, capped the growth of assessments on homes and businesses and made it tougher for state and local governments to raise any other kinds of taxes by imposing more stringent voting requirements on tax increases.

The state, which had accumulated a surplus of between $5 billion and $8 billion under tightfisted Govs. Ronald Reagan and Jerry Brown, stepped in to fill the void. It spent its surplus billions to bail out cities, counties and school districts whose own budgets had been left in disarray.

But that was only the beginning.

The Legislature, in addition to making commitments to local governments, caught tax revolt fever as well.

Sen. Alfred E. Alquist (D-San Jose), the veteran chairman of the Senate Budget and Fiscal Review Committee, looks back on those days with regret. He and other officials, at wistful moments, plug figures into computers to find out what would have happened had none of the tax cuts been approved. Assuming normal growth, they figure California’s state and local governments would have about $30 billion more to spend than they do.

Alquist said: “We compounded the problem of Proposition 13 when we got caught up in the tax revolt. First, we indexed the income tax to inflation. That put a cap on the growth of our own revenues, which now don’t go up with inflation, although our expenses do.

“And we followed that up,” the legislator said, “by reducing the top (state) income tax bracket from 11% down to 9.3%. That costs us $1.25 billion a year. Then we had a (weather) freeze, and then the drought and water rationing, and then the recession hit us.”

Alquist left a few tax cuts off his list. The Legislature also voted to eliminate the state inheritance tax, enacted a whopping tax cut for multinational corporations by virtually eliminating the unitary tax, and lowered the tax rate charged all corporations from 9.6% to 9.3%. The lawmakers also adopted liberal federal guidelines, allowing corporations to write off losses over a period of 15 years.

The corporate tax rate cuts, enacted in 1987, were accompanied by other tax changes designed to generate income so the overall impact of the revisions would be what government officials call “revenue neutral,” or a wash. But the Legislature’s calculations were off badly.

According to the Assembly Revenue and Taxation Committee, over the last four budget years, the share of corporate tax to the state’s general fund has dropped from 15% to 11%, meaning it has not been growing as fast as personal income taxes or sales taxes. Some of that can be explained by the recession, but much is because of miscalculations by the Legislature, officials say.

“We were assured it would be revenue neutral, but it wasn’t,” Alquist said.

Meanwhile, outside the Capitol, demands were growing for limited government dollars.

The population explosion of the 1980s was largely driven by what state officials call “high cost” residents--foreign-speaking immigrants who have a much greater demand for public services than those relocating here from other states.

Also, some very costly services were growing even faster than the population.

Between 1980-81 and 1990-91, the largest block of welfare recipients, those in families, grew an average of 3.2% each year. California’s population rose at a much slower pace--2.3% annually.

In fact, the state’s welfare caseload grew three times faster than the national average, according to the legislative analyst’s office. More troubling to budget analysts is that the number of welfare families has been accelerating in the last couple of years, up 6.1% in 1989-90, an estimated 6.9% in 1990-91, and an expected 6% in 91-92.

The recession and increased numbers of teen-age pregnancies are among the factors often blamed for this rapid growth.

A related problem is the soaring cost of the Medi-Cal program, set up to provide a broad array of free medical services for the poor. The governor’s proposed budget for 1991-92 provides $9.3 billion for Medi-Cal, up more than 9% over the current year and more than twice the $4 billion it cost in 1984-85.

Also, the number of children in kindergarten through high school is expected to grow during the next school year by as much as 230,000, pushing enrollments over 5 million--an important factor because the state guarantees that school districts receive just over $4,000 for each student. Meanwhile, prisons continue to overflow with inmates. By the end of the next budget year, June 30, 1992, California prisons are expected to be incarcerating more than 118,000 men and women, most of them because of tough sentencing laws passed during the 1980s. That is more than triple the 35,000 adult prisoners behind bars when Deukmejian took office in 1983. Each prisoner costs a minimum of $20,000 to keep locked up for a year.

State budget problems began mounting in 1983, the year when the last of the surplus funds ran out and ex-Gov. Brown bequeathed a $1.6-billion deficit on his successor, Deukmejian.

Since then, there have been good years, when the expanding economy of the Reagan era kept state government running relatively smoothly. Taxpayers even got $1.1 billion in rebates when a healthy surplus developed one year. For the last three years, the state has been spending more than it has been taking in.

Lawmakers from both parties complain that much of the ongoing budget problem stems from factors beyond their control.

State budget officials estimate that as much as two-thirds of the $12.6-billion budget problem is tied to the “cyclic” nature of the recession. At least 26 states are contemplating tax increases to bail themselves out of troubled financial waters this year. Several states have much bigger deficit problems than California, when the potential deficits are judged as a percentage of the overall budget.

Officeholders also point out that roughly 92% of the state budget is controlled by state constitutional requirements, statutory entitlement programs that require the state to provide services to anyone who meets eligibility requirements, legal restrictions stemming from contract law, judicial decisions, and commitments to provide money for programs as caseloads rise.

But these officeholders helped create most of these restrictions. All but a handful of Democrats supported Proposition 98, which earmarks 40% of available general tax dollars for public schools and community colleges. They also wrote, beginning in the late 1960s, laws that guarantee welfare recipients and others automatic benefit increases that are tied to the rate of inflation.

Legislative analyst Elizabeth G. Hill has warned the Legislature that over the next 10 years, if nothing is done, spending commitments will drive up costs at a rate of 10% to 11% annually while revenues, assuming normal growth, will rise at an average yearly rate of 8%.

“I believe it will be a very long summer,” said Assemblyman Richard L. Mountjoy (R-Monrovia). “The problem is that 92% of the budget is on automatic pilot. Even if we had $10 billion in tax increases, you couldn’t catch up to the problem.”

Democrats say that tight spending policies of recent years have reduced services so low that hefty tax increases are the only way out.

“We’ve got to come up with a solution that doesn’t leave us with more school dropouts, more drug addicts, more sick, more homeless,” said Assemblyman John Vasconcellos (D-Santa Clara).