$2.7-Billion Error Found in Wilson Budget : Finance: Controller says state may not be able to show it will have the money to redeem bonds the governor wants to sell. Others say the mistake will not force changes in the spending plan.

A $2.7-billion accounting error made by Gov. Pete Wilson’s staff threatens to undermine the governor’s newly released proposed budget for the fiscal year that begins July 1.

Wilson aides conceded Tuesday that the error was made but insisted it will not force changes in his proposal.

“We caught it and corrected it,” said H.D. Palmer, a spokesman for the Department of Finance. “The bottom line is that this correction does not have an impact on the budget plan.”

But state Controller Gray Davis--who must sign off on $5 billion in borrowing Wilson has proposed--disagrees. Davis said it appears that the state, under Wilson’s proposal, will not be able to show that it will have sufficient money on hand to repay that debt on schedule in the spring of 1996.

“We are asking people to loan the state of California $5 billion,” Davis said in an interview. “They want to know how they are going to get their money back. I am not going to sell them a bill of goods.”

The error has implications beyond the state budget battle. Wilson, a Republican, is running for reelection against Democrat Kathleen Brown, who as state treasurer is well positioned to exploit any blemish on Wilson’s fiscal record. Brown had no comment on the matter Tuesday.

The accounting error does not mean that the state’s budget shortfall--which Wilson has estimated at $4 billion--is any larger. But it does cast great doubt on the state’s ability to pay its bills under the plan Wilson has proposed.

The mistake occurred in the Administration’s estimate of the state’s cash flow--a chart that shows how much the government will take in from taxes and pay out in expenditures each month between now and the end of the 1995-96 fiscal year.

There actually were three errors, Palmer said. The biggest occurred when an unidentified analyst calculated expenses for the state Medi-Cal program, which provides health care to the poor. The analyst was supposed to enter $333 million as an estimate of the savings from cuts Wilson has proposed. But he entered the number as $3.33 billion instead.

Two other smaller errors--one in the state’s favor and one not--left the final number off by $2.7 billion.

So instead of the state having $3.2 billion in cash on hand as of June 30, 1996, as Wilson said this week, the new estimate shows there will be $449 million. Even that assumes the state will receive an unprecedented infusion of federal funds for immigration costs in the 1995-1996 fiscal year--a hope Wilson has abandoned for the short term but still is counting on for a year from now.

If that money does not come through, the state would be deep in the hole.

The state borrows money by issuing interest-paying notes that are purchased by Wall Street investors. In order to market those bonds on Wall Street, the state must show that it will have enough money on hand to redeem the notes when they come due.

Wall Street analysts already have said they do not consider the hoped-for federal funds to be sufficient because there is no guarantee that Congress will approve the money.

Anticipating such a challenge, Wilson’s finance director, Russell Gould, said the state would have $3 billion in various internal funds from which it could borrow. If the federal money came up short, he said, the state, in effect, would borrow from itself to pay back the investors.

Now that cushion is gone. Palmer said that instead the state will tell Wall Street it will make additional budget cuts to free up cash to replace the federal money if need be. But Davis, the state’s chief fiscal officer, said that is not good enough.

“It’s like when you go to borrow some money to buy a house and the bank says it wants you to put up a $10,000 down payment,” Davis said. “You can’t say here’s $3,000, I’ll give you the rest later, now give me the loan. It doesn’t work that way.”