Treasurer Calls for Extending 1/2-Cent Tax : Budget: Brown says temporary surcharge should continue and pay off state’s growing deficit. Wilson opposes the idea.

State Treasurer Kathleen Brown called Wednesday for extending the temporary half-cent sales tax surcharge and dedicating the money to a special fund to pay off the state’s growing deficit over a period of years.

Brown suggested that an agency be established specifically to retire the deficit. She said New York and other states used similar entities to pull themselves out of budgetary woes.

“Unless we address this crisis this year,” Brown said, “we risk going into a free fall.”

Brown’s comments came as the Assembly’s budget-writing committee sent two alternative spending plans to the Assembly floor and the Wilson Administration released new figures showing the state’s budget shortfall had worsened because property tax revenues have not grown as much as expected.

Brown made her suggestion for a multi-year solution to the state’s budget woes at a special hearing of the Debt Advisory Commission, which she chairs. The proposal represented the Democratic treasurer’s most forceful recommendation to date on the budget and put her at odds with Republican Gov. Pete Wilson, whom she is expected to challenge in next year’s election.

Wilson, asked if he would support a plan like the one Brown proposed, said: “I don’t think so.”

Brown’s plan would require approval from the Legislature and governor, and the courts might have to rule on the constitutionality of a multi-year recovery strategy.

Without the plan, Brown said, 10 cents of every dollar spent in next year’s budget will go toward repaying the deficit left over from the current fiscal year, which ends June 30. She places the deficit at $4 billion, including nearly $1 billion owed by the public schools.

The half-cent sales tax surcharge, due to expire June 30, brings in about $1.5 billion annually. Under Brown’s suggestion, the tax would remain in effect for perhaps three years, with any excess going into a reserve fund.

She said the state ran out of money in April and had to borrow $3 billion in short-term loans to pay its operating expenses for the remainder of the year. Altogether, the state general fund will borrow $10 billion to pay this year’s obligations.

Brown likened the state’s cash flow problem to someone who has no cash in his wallet, has tapped out his Visa card, must pay it off with a MasterCard, and then needs a parent’s co-signature to guarantee repayment.

“A demeaning story is being told on Wall Street,” Brown said. “It affects our reputation in the market place.”

Several financial and legal experts testified at the hearing. The money experts from bond rating agencies and brokerage houses described how investors hope that California will get its financial house in order by raising more revenue and controlling its spending.

In other budget-related news Wednesday:

* The Wilson Administration reported that the budget shortfall has grown by $600 million--pushing the total two-year gap to more than $9 billion--because local property tax revenues that were supposed to go to the public schools have come up short.

Deputy Finance Director Steven Olsen said about half the shortage was due to slower than expected growth in the assessed value of property. The rest of the shortfall came about because legislation passed last year to shift property taxes to the schools from special districts that provide fire protection, water and other services is not transferring as much revenue as expected.

* The Assembly Ways and Means Committee sent two budgets to the Assembly floor. One version assumed that the half-cent tax would expire on schedule; the other assumed that the levy would be extended for at least one more year.

Neither version is expected to be adopted in its current form, but elements from both may be folded into whatever spending plan is enacted.

* Wilson and legislative leaders met for the first time this year to begin negotiations on an economic package that could include an overhaul of the workers’ compensation system, streamlining of the state regulation and tax breaks for businesses.