Perils on All Sides Threaten to Derail State’s Fiscal Plan : Budget: Economic, judicial, political factors could upset the balance. Spending plan bodes ill for O.C. libraries and flood control, well for parks.

California’s new state budget is more stable than its recent predecessors but is so precariously balanced that it could be knocked off course by any of a variety of political, judicial or economic factors.

Unlike the state’s previous two budgets, this $52.1-billion spending plan rests on conservative assumptions about the state’s economic prospects, which make it more likely to remain balanced over the next 12 months.

But if voters in November reject the extension of a half-cent sales tax surcharge, local governments will be on the state’s doorstep pleading for relief. The courts also could throw a wrench into the gears by striking down a controversial shift of property tax revenue from cities, counties and special districts to schools.

And although this budget includes fewer onetime shifts and bookkeeping maneuvers than earlier efforts, it does hide part of the state’s problem by postponing repayment of the state’s carry-over deficit and borrowing money to keep school funding at current per-pupil levels.

“In this budget, the state has actually made some very significant reductions in spending,” said Lynn Reaser, senior economist with First Interstate Bank. “It indicates that they have come to terms with the poor condition of their revenues. Next year will remain a difficult period for resolving the budget but perhaps not as difficult as this year.”

The budget, signed into law Wednesday night by Gov. Pete Wilson, includes general fund spending of $38.5 billion, down $2.6 billion, or 6.3%, from the fiscal year that just ended.

The spending plan protects funding for prisons and public schools while trimming welfare benefits, raising community college and university fees, and forcing local governments to shift about one-fourth of their property tax revenue to the schools.

In Orange County, Budget Director Ronald S. Rubino said the budget and accompanying legislation could mean more bad news for the county’s library and flood control systems but a reprieve for the Harbors, Beaches and Parks Department.

According to a tentative accounting, the county parks system--once scheduled for a $9-million reduction--would be cut by only $400,000, saving up to 70 jobs. (The state formula shifts a larger share of property tax money from special districts to public schools.)

“We were looking at closing some parks and reducing hours, but we got a reprieve,” said Robert G. Fisher, harbors, beaches and parks director. “Unless there is a miracle cure for the California economy, I don’t think we can rest easy. They could be coming back at us next year.”

Rubino said new estimates would have libraries, already marked for a 44% overall reduction, losing an additional $1.6 million, while flood control services would be reduced by $8.7 million more.

“This is very speculative,” Rubino said. “It’s not over yet. This all could change depending on what the new legislation says. It’s going to take us two weeks to go through it all.”

Even though the new numbers provide a mixed review for Orange County, officials did manage to escape a “worst case scenario” that would have forced the closure of two fire stations and the James A. Musick Branch Jail in Irvine.

“I’m not crying in my beer,” Board of Supervisors Chairman Harriett M. Wieder said. “The parks were saved, but the libraries are still a disaster.”

State lawmakers from Orange County, meanwhile, suggested the county and cities got off far better than anyone had hoped.

“I think we got the best that we could have gotten,” said Assemblyman Mickey Conroy (R-Orange). “Compared to most other counties, Orange County did very well.”

But the property tax transfer, the cornerstone of the budget, also could prove to be its undoing.

The shift prompted such an outcry from local governments that Wilson and the Legislature agreed to extend a temporary half-cent sales tax for six months and give the revenue to counties and cities. The voters will be asked in November to make the half-cent levy a permanent source of funding for local government.

If the voters reject the measure, counties and cities will face a $1.4-billion annual revenue gap and the state will be under tremendous pressure to bail them out.

Several local governments, meanwhile, have threatened to refuse to go along with the property tax transfer. Some are preparing to sue the state to try to block the policy. If they are successful--an unlikely prospect at this point--a huge hole would open in the state’s budget.

The more direct threat to the budget’s bottom line is posed by the state’s shaky economy. The budget is part of a two-year plan that envisions a relative tiny, $100-million surplus after the state spends $80 billion between now and June 30, 1995.

A year ago, the Wilson Administration was forecasting that Californians’ personal income would grow by 7.8% in 1993 on the strength of such underlying factors as a 2.7% growth in employment and 190,000 new housing permits. Income growth, it turns out, now appears to be about half what was projected. Employment fell instead of rising. And only a little more than half the expected housing permits actually materialized.

The result: The state’s general fund revenues, originally projected at $43.4 billion, came in nearly $2.5 billion short of that mark.

This year, however, the Administration has taken a more cautious approach. The Department of Finance has forecast a modest recovery at a sluggish pace. Its projections for income, employment and housing are in line with or more pessimistic than those published by California’s major banks.

“We are in a situation now where although we’re not seeing employment gains, we’re not seeing sharp increases in housing starts, we’re not seeing retail sales pick up, there is substantial evidence that the situation has at least stabilized,” Deputy Finance Director Steven Olsen said.

If these conservative projections prove too optimistic, the state will be in the midst of an economic downturn of historical dimensions.

“It is almost statistically impossible to have another shortfall of this magnitude,” said Assemblyman Steve Peace (D-Chula Vista), chairman of the Assembly Finance and Insurance Committee. “You’d have to have just an incredible economic collapse. If we are in that kind of a situation, we will have a lot bigger problems on our hands than a state budget.”

But some experts believe that the budget will have problems even if the economic forecasts hold true. The bipartisan Commission on State Finance, for example, agrees with the Administration’s economic projections but believes that those conditions will produce $700 million less in revenue than Wilson is anticipating.

In addition, many legislators, particularly Republicans, are complaining that the budget employs two major bookkeeping shifts that will come back to haunt the state.

One is in the handling of the deficit.

In this budget, the state abandoned its traditional practice of immediately paying off any debt carried over from one fiscal year to the next. Instead, Wilson and legislators agreed to stretch the debt repayment over 18 months.

This maneuver could cut two ways. If the economy tumbles further, a new deficit will emerge on top of the one that this budget, in effect, is hiding. Wilson warned of that danger a year ago when Democrats proposed the same approach.

But if the Administration’s economic and revenue projections hold true, the deficit will be paid off on schedule and the money that had been used to make the payments will be available to spend on programs--in this case about $1.2 billion for the 1995-96 fiscal year.

In this sense, the state is like a family that spends more than it takes in until it is faced with a $3,000 credit card balance. To pay off the debt, it must first reduce its spending so that ongoing bills no longer exceed income. Then the family uses that cushion to make regular payments to the credit card company. When the family has paid off the bill, it can spend the money that had been going to credit card payments on something else, or save it.

Unlike this hypothetical family, however, the state is continuing to spend beyond its means. It is doing so by using another bookkeeping maneuver.

For the second consecutive year, the state is borrowing money from private banks and investors and then lending it to primary and secondary schools and the community colleges. Over the two-year period, these loans will total about $1.7 billion. The tactic has allowed the state to keep per-pupil funding stable without tapping further into its treasury.

The schools, not the state’s general fund, are on the hook for that debt. When economic good times return, the schools will be forced to repay the loans by accepting smaller annual funding increases than they otherwise would be entitled to by the state Constitution.

Despite the effort to move the deficit and the school loans off the state’s books, critics say the maneuvers represent real problems for the state’s fiscal future.

“By doing these things, it allows the state to spend more than we take in,” Assemblyman Pat Nolan (R-Glendale) said.

Dan Schnur, Wilson’s chief spokesman, said the bookkeeping moves were not options the governor chose lightly.

“Neither option is a perfect one,” Schnur said. “But they are the best alternatives available to spending cuts that would have been truly dangerous or large-scale tax increases that could have further damaged the economy.”

Many Republicans also criticized the governor for pushing a vote on the half-cent tax, ostensibly to fund police and fire departments.

“I opposed it and I’ll certainly speak against it,” said Assemblyman Curt Pringle (R-Garden Grove). “The truth is they’ll be able to take money from jails and police, put that money somewhere else, then backfill those holes with the tax money.”

Times staff writer Eric Bailey contributed to this story.

* CRYSTAL COVE REPRIEVE: Eviction of beach cottage tenants postponed 2 1/2 years. B4