Revise Budget or Face IOUs, Controller Says : Finances: Davis says he will not approve borrowing the $5 billion needed to keep the state running unless Wilson addresses cash flow problem. Scrip could be issued in July.

Raising the specter of issuing IOUs once again, state Controller Gray Davis said Wednesday that Gov. Pete Wilson’s proposed budget “does not fly” because the state cannot show that it will have sufficient cash to repay the loans on which Wilson’s plan depends.

A $2.7-billion accounting error led the Republican governor to overestimate the state’s cash reserves, and now Wilson has nothing to back up his two-year borrowing plan but a fragile hope for a huge infusion of federal funds the year after next, Davis said.

“We have cried wolf before,” said Davis, the state’s chief fiscal officer. “Believe me, this time the wolf is at the door. The wolf is here.”

Wilson is required to have Davis’ approval to go to Wall Street for $5 billion in cash that the state needs to borrow in late July to pay employees, aid the schools and keep prisons and parks running.

But without major changes in Wilson’s plan, Davis said, he will not grant that approval.

“The governor’s budget plan does not fly,” Davis said. “It is a cut-and-paste job that does not sell on Wall Street.”

Davis said he will begin issuing IOUs, officially known as registered warrants, in early July if a credible spending plan is not in place by then. The fiscal year ends June 30.

The scrip would go to private companies owed money by the state, Medi-Cal doctors who care for the poor, and others. The courts have ruled that the state cannot pay its employees with IOUs, so Davis said he will husband what little cash is in the government’s accounts to meet the payroll.

Wilson, in a statement released by his office, did not respond directly to Davis’ criticism but said he will work with the controller and Legislature to “provide the necessary assurance to the financial markets that California remains a solid investment.”

The state for years has been wrestling with parallel but distinct fiscal problems, one in its budget and the other in its cash flow.

It is possible for the state to run up a deficit in its general fund without going broke, and the state has been doing so for several years now. When this happens, the government can pay its bills by borrowing from various independent, internal funds.

This practice is analogous to a family that spends more than it takes in but manages to stay afloat by borrowing from the children’s college fund. After too much deficit spending, however, the college fund runs dry, and the family is broke. That is where the state is headed today.

Wilson’s answer to the problem is akin to telling the state’s creditors that he will pay them back with money he is hoping to squeeze out of a rich but frugal uncle--the federal government.

Wilson has conceded that the federal money, which he wants as reimbursement for the cost of serving illegal immigrants, will not arrive this year, but he is still counting on it for the fiscal year that begins July 1, 1995. Davis said it is not prudent for the state to rely on more than $600 million of the $2.8 billion that Wilson is hoping to wrest from Washington.

Under the scenario put forward by Davis, the state would run out of cash well before April, 1996, when the borrowing Wilson is proposing comes due.

Davis suggested that the governor and lawmakers adopt a series of triggers that would automatically enact tax increases or spending reductions if the federal funds Wilson is hoping for do not materialize.

“This is gut-check time,” Davis said. “We need a clear expression of gubernatorial and legislative will.”

The budget situation in this election year is intertwined with campaign politics perhaps more than ever before.

Wilson is running for reelection against Treasurer Kathleen Brown and has no desire to see a repeat of the 1992 debacle in which the state went 64 days into the fiscal year without a budget while paying its bills with IOUs. It also sent his public approval rating plummeting.

He was at war with the Democrats in the Legislature that year, but many lawmakers and Wilson have since concluded that a late budget only gets the public mad at all incumbents, no matter who is at fault.

As a result, Democrats appear ready to work with Wilson to enact a budget quickly, perhaps as soon as next week, if he is willing to compromise on the harshest of the health and welfare cuts he has proposed.

“I don’t sense there is anyone of any political stripe who wants to go through a drawn-out and nasty budget fight,” said H.D. Palmer, the state Finance Department’s spokesman. “People want to take the steps to get this done and done right.”

But Brown and Davis, the Democratic nominees for governor and lieutenant governor, do not see their fortunes suffering from a late budget and therefore have been more willing to call attention to the questionable assumptions in the governor’s plan.

Brown on Wednesday made Wilson’s latest woes the subject of a campaign event outside her Capitol office.

The governor’s performance, she said, was “inept, ineffective and incompetent.” But Brown offered no proposals to help pull the state out of its mess.