NEWS ANALYSIS : Deal on Closing State Budget Gap Taking Shape

Even as the Legislature missed the constitutional deadline for passing a new state budget, Gov. Pete Wilson and legislative leaders appeared Monday to be shaping the outlines of an agreement to close the state’s $10.7-billion budget gap.

When the deal emerges from a series of closed-door negotiations, it is likely to include reductions of 5% to 15% in health and welfare programs, a cut in local government spending, and the elimination of a number of state boards and commissions, possibly even a department or two.

The final sticking point probably will be over how deeply, if at all, to cut the budget for public education. Democrats may push to postpone repaying part of the state’s deficit for a year to avoid reducing education spending. Republicans generally oppose the delay.

Although Monday was the Legislature’s deadline for passing a budget, it is routinely missed. Budgets have been passed by June 15 in only four of the last 16 years; there is no constitutional or statutory penalty for missing the date.

The more serious deadline is July 1, when the fiscal year begins and when, if a budget is not in place, the state risks running out of money and issuing IOUs instead of checks to its employees and creditors.

Wilson met last Tuesday through Saturday and on Monday in his office with Assembly Speaker Willie Brown, Senate President Pro Tem David A. Roberti, Assembly Republican Leader Bill Jones and Senate Republican Leader Ken Maddy to try to reach agreement on a package that they can push through the Legislature before an army of lobbyists mobilizes to oppose it.

Wilson has said little to reporters about the budget since Wednesday, and the legislative leaders, upon leaving their meetings with the governor, have provided only vague descriptions of the agenda and insisted that they have yet to reach agreement on any issue.

But their comments over a period of days, combined with lists of budget-cutting options that have been made public and interviews with lobbyists and aides, suggest that the framework of a deal is close at hand.

Wilson and the Legislature confront a problem that has been described as a $10.7-billion shortfall, but that amount overstates and obscures the true nature of the predicament. The figure represents what it would cost to repay the deficit expected at the close of the current fiscal year, rebuild a reserve for emergencies, and deliver all services at their current levels while serving new students, welfare recipients and prison inmates for another year.

Here is another way of looking at it: The state will spend about $44.2 billion from its general fund this year and expects to end up with a $3.8-billion deficit. Without a tax increase, the state expects to collect about $41.8 billion in taxes next year, leaving the government with about $38 billion to spend.

This is the way members of the leadership group are looking at the dilemma. Trying to avoid a major tax increase, they have conceded that they cannot rebuild a reserve or set aside enough to meet every program’s growing caseload.

Instead, they are seeking about $6.4 billion in cuts to balance the budget, and they have divided the problem into two pieces: public education, whose funding is guided by voter-approved Proposition 98, and everything else. They have set education aside until later and are seeking to cut the rest of the budget by $4.1 billion.

Wilson and the legislative leaders asked rank-and-file lawmakers last week to help them identify specific reductions needed to achieve that $4.1 billion cut, which would slash state spending by 15.5%.

But the cuts in services may not be that deep. The legislature seems likely to accept about $1 billion in proposals Wilson offered in January that would not cut into programs but that state officials consider to be budget cuts because they relieve the general fund of obligations. They include:

- A 40% fee increase for California State University students and a 24% fee hike for University of California students.

- A 5% salary deferral for state employees.

- Finalization of a deal struck a year ago to use reserves in the state employees pension fund to reduce the general fund’s annual contribution to the retirement program.

- Elimination or suspension of the renters tax credit.

As a condition of eliminating the renters credit, which costs the state about $375 million a year, Democrats are insisting that Republicans agree to a similar but as yet unidentified revenue-raising measure that would hit the wealthy or businesses. That would shave another $300 million or $400 million off what must be cut, bringing the total reduction needed in non-education programs down to about $2.8 billion, or about 10.5%.

The leadership group also is looking at proposals to eliminate programs supported by special funds--taxes or fees set aside by law for specific purposes. Those dollars would be shifted to the general fund, which pays for most state programs and is supported mainly by the income, sales and bank and corporation taxes.

A legislative committee identified $430 million that could be shifted to the general fund by taking income generated by special fund commissions and agencies. Among the options listed: rental income on state property, proceeds from the sale of state-generated documents and information, and income from investments.

Another legislative task force said the state could save $100 million by eliminating some duties of the California Energy Commission, the Fire Marshal, the state architect, the Lands Commission and the Franchise Tax Board that overlap with functions performed by state or local agencies.

If each recommendation was adopted, the amount remaining to be cut would be reduced further, to about $2.2 billion, or 8% of the non-education budget.

The biggest piece of this reduction probably would come from health and welfare programs, which account for more than 25% of state spending. Wilson this year proposed saving the state about $600 million by cutting welfare grants 10% immediately and another 15% after six months for families with an able-bodied adult. Democrats oppose Wilson’s plan but have agreed to reduce grants as much as 4.5%. A compromise somewhere between those two levels seems likely.

Without even looking at welfare grants, a bipartisan legislative task force on health and welfare issues identified 39 measures that would save the state up to $683 million. These included the expanded use of managed care for the most costly Medi-Cal patients, reduced payments to nursing homes, and elimination of the Department of Mental Health, now that most of its former duties have been shifted to the counties.

The state prison system and higher education also have been targeted for cuts, but the governor and legislative leaders are waiting until they see what reductions can be made elsewhere before deciding how much to trim from these programs.

The issue most lawmakers expect to be the last resolved is spending for kindergarten through community colleges, which comes under the guidelines established in 1988 when voters amended the Constitution by passing Proposition 98.

The measure generally ensures public schools of a budget equivalent to about 40% of the state’s general fund revenues. But when the state crafted the budget for the current fiscal year, it overestimated revenues and therefore the schools’ minimum share, appropriating $1.1 billion more for public education than Proposition 98 requires.

The schools have spent that money, so it is too late for the state to take it back. But there is still time before the end of the fiscal year to reclassify the overpayment as a loan, requiring the schools to repay it out of next year’s revenues. Declaring the $1.1 billion to be a loan rather than an appropriation would reduce the Proposition 98 guarantee for the coming year by another $1.2 billion because each year’s budget for education is built upon the previous year’s appropriation.

Altogether, the schools stand to lose as much as $2.3 billion from the $18.5 billion Wilson proposed in January. State schools Supt. Bill Honig says this would reduce state aid to schools by $224 per student, leaving the state nearly $1,000 below the national per-pupil average.

But Wilson and the legislative leaders are studying a proposal that would blunt the schools cut by shifting about $1 billion in property tax revenue to public education from cities, counties and special districts. To make up for the loss, counties would be relieved of some state requirements and given broader authority to raise local taxes. Cities and special districts would be forced to raise taxes and fees to avoid cutting their budgets.

The property tax shift would reduce the potential schools cut to around $1 billion. Speaker Brown and his Democratic allies are developing a proposal to prevent that final cut by delaying for one year repayment of part of the state’s deficit. To broaden support for the move, they hope to package the deficit financing proposal as a loan to schools, which enjoy greater support among voters and legislators than do social programs for the poor.

Wilson and Republicans in the Legislature say they will oppose any attempt by Democrats to roll over part of the deficit rather than cutting spending to repay the entire amount in the next fiscal year. But Democrats hope that public pressure to protect education will lead the governor and a handful of Republicans to agree to the proposal after Democrats accept cuts in the rest of the budget.

Budget Issues at a Glance

Here is a summary of the major issues Gov. Pete Wilson and legislative leaders are confronting as they craft a plan to erase the state’s $10.7-billion budget gap:

Reserve--The state has wiped out its reserve for emergencies and it would take about $1.2 billion to rebuild it to 3% of the general fund. Wilson and legislators have agreed that the state will risk going a year with a tiny reserve or none at all.

Deficit--The state will end the current fiscal year with a deficit in its general fund of about $3.8 billion. Wilson wants to cut the budget enough to repay the entire deficit. Democrats suggest delaying part of the repayment.

Health and Welfare--The Wilson Administration’s latest estimates show the number of welfare cases climbing 332,000, or 8.9%, next year while the number of poor people eligible for Medi-Cal will climb 397,000, or 8.6%. Wilson and the Democrats have agreed that these growing caseloads will be served with less money than this year. Welfare grants face an immediate cut of 4.5% to 10%.

Streamlining Government--Several boards, commissions and departments may be eliminated or consolidated, including the California Energy Commission, the Franchise Tax Board and the State Lands Commission.

Local Governments--Democrats suggest easing the state’s problem by reversing the “bail-out” enacted in 1979 to soften the impact of Proposition 13 on local governments. The new proposal would shift some property tax revenue from cities, counties and special districts to the public schools. The schools, in turn, would shift some of their general tax revenue back to the state. Local governments would have to raise their own taxes and fees to avoid cutting their budgets. Wilson has not stated his position but has proposed shifting property tax revenue from special districts to the schools.

Education--Even while expecting about 204,000 more students, schools serving students in kindergarten through community colleges could receive about $1 billion less next year from the state than they received in the academic year now ending. Some Democrats want to soften the impact on schools by shifting money from local government to public education and possibly delaying repayment of part of the state’s deficit. Republicans oppose carrying over any part of the deficit into the 1993-94 fiscal year. Wilson and Democrats are close to agreement on a 24% fee increase for UC students and a 40% boost in fees at the California State University. But the budgets for both higher education systems may still be cut by 10% or more.