Perils on All Sides Threaten to Derail State’s Fiscal Plan : Budget: Spending package is more stable than its recent predecessors. But judicial, political and economic factors could upset carefully crafted balance.

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.

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.

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.”

How Budget Breaks Down

The 1993-94 budget signed by Gov. Pete Wilson allocates $52.1 billion for the fiscal year that began Thursday. To balance the budget, Wilson and lawmakers kept education spending about at its current per pupil levels in elementary and high schools, primarily by forcing local governments to shift $2.6 billion in property taxes to shools. Prison spending was increased to keep pace with the growing number of inmates. Reductions will come in cuts to welfare recipients and universities as well as in other services and administrative costs. Graphs below show spending in nine major budget categories from 1989-90 to 1993-94. HEALTH & WELFARE; 1993: $16.0 billion K-12 EDUCATION; 1993: $13.9 billion ADMINISTRATIVE & LOCAL ASSISTANCE PROGRAMS; 1993: $5.3 billion HIGHER EDUCATION (Includes student fees); 1993: $5.2 billion BUSINESS, TRANSPORTATION, HOUSING; 1993: $3.8 billion PRISONS, YOUTH AUTHORITY; 1993: $3.3 billion NATURAL RESOURCES/EPA (Includes parks, water systems & forestry regulation and, as of 1991-92, Cal/EPA); 1993: $2.0 billion CONSUMER SERVICES (Mostly regulatory agencies); 1993: $0.7 billion TAX RELIEF (Includes renters tax credit & property tax exemptions); 1993: $0.4 billion

Counting bond fund expenditures not shown here that fluctuate year to year depending on construction schedules, overall state spending for 1993-94 totals $52.1 billion.

SOURCE: Dept. of Finance

How You Could Be Affected

The state budget--with its billions of dollars in spending and its sizable deficit--will have a direct impact on many Californians. If you are: * A tenant, you will lose your renters tax credit. The credit is now $60 for individuals with incomes below $20,500 and $120 for couples with incomes below $41,000. * A community college student, your fees will go up from $10 a unit to $13. If you already have a bachelor’s degree, expect to continue paying $50 per credit. * A University of California student, your fees will go up, but more likely by about $630 instead of the $995 that was approved by the UC Board of Regents. That means that the typical fee for undergraduates for the 1993-94 school year will be about $3,675--not counting personal and living expenses, books and various activity charges. * A Cal State student, your fees will go up $132, not the $480 that the CSU Board of Trustees agreed to in March. That means that undergraduates fees will average about $1,440 for the upcoming school year, not counting personal and living expenses, books and various activity charges. * A scholarship student, your state-funded Cal Grant will probably rise to offset increases in fees or tuition. Average scholarships will increase from $2,100 to $3,500 at UC, from $900 to $1,500 at Cal State and from $4,450 to $5,250 at private schools. * A welfare parent with two children, your grant from the state will drop from $624 a month to $607. * A poor, aged or disabled person living independently, your monthly grant will drop from $620 to $603. * Blind, your monthly grant will drop from $689 to $658 for an individual, from $1,333 to $1,214 for a blind couple. * An adult receiving general assistance from your county, your local board of supervisors may be able to cut your grant to $221 a month. In Los Angeles County that is a drop of 27% from the current grant of $302. * An adult receiving Medi-Cal, the health coverage program for low-income families, you will lose some benefits, such as dentures that are considered cosmetic and not essential for eating. * A consumer, you will continue to pay the half-cent sales tax surcharge on most purchases. The levy was supposed to end June 30 but will not expire after all. It will be extended at least six months and would continue indefinitely if approved by voters in November.