Automatic Cuts Studied as Budget Impasse Continues

With international bankers in town to discuss lending the state government the money it will need to pay its bills, legislators tried on Tuesday to draft an extraordinary standby plan that would trigger automatic budget cuts and tax increases if the state’s fiscal condition worsens.

But legislators and Gov. Pete Wilson remained deadlocked Tuesday over seemingly irreconcilable differences and faced the prospect of another round of IOUs if they fail to act by the start of the fiscal year Friday.

Wilson and his Republican allies in the Legislature insist that the new state budget and the debt management plan that accompanies it must be free of tax increases.

Democratic leaders want to include taxes in the equation. On their list of options is an extension of a temporary income tax surcharge on the wealthy and a narrowly targeted tax increase for closely held corporations.

There was no sign of a breakthrough Tuesday, and the Assembly and the Senate scheduled votes for today.

“I’m not terribly optimistic,” Assembly Speaker Willie Brown said Tuesday after Assembly Democrats met with the Republican governor’s top fiscal adviser, Finance Director Russell Gould.

Controller Gray Davis said he was discouraged by the lack of progress in the Legislature and that he would begin issuing IOUs--officially known as registered warrants--between July 5 and July 12 if the state is still without a budget by then.

The fight over the budget bill is taking a back seat this week to the struggle over a companion measure that is needed to persuade investors that the state is a decent credit risk.

The state government is already deep in debt and needs to borrow at least $4 billion more by late July to pay its bills. But investors will be hesitant until the state provides greater assurances than it has to date that the debt will be repaid on schedule in 1996.

The state has borrowed previously to finance its general fund operations. Even when it ran a budget deficit, the state was able to repay private banks by borrowing from independent internal funds, the way a family might tap into a retirement account or a child’s college fund.

But now even those funds have run out of money, and the state, under Wilson’s two-year budget plan, would be hard-pressed to pay back the banks without a big federal bailout the year after next.

Wilson has demanded $2.8 billion in new funds from Washington to reimburse the state for the cost of serving illegal immigrants. But Wall Street is skeptical about the prospects for such a huge, new infusion of federal aid.

To reassure the investors who will buy the state’s bonds, the government plans to acquire credit insurance from a syndicate of banks led by Bank of America. The banks--for a price--will pledge to repay the debt if the state cannot deliver.

But the banks need their own assurance that the state will repay them if they are required to step in.

Anthony Taddey, managing director of BankAmerica Securities, said the banks need to be convinced that the state’s obligations are both legally and financially sound. But he said it is not the job of the banks to tell the state how best to produce a healthy bottom line.

“We don’t try to usurp what we believe is the province of public sector decision makers,” Taddey said after bankers from Europe, Japan and North America met with Davis and two Democratic legislators. “We really think that public sector decision makers--politicians, state constitutional officers and the like--their reasoned judgments have to come into play here.”

To satisfy the banks, legislators are studying several versions of legislation that would trigger an automatic fiscal fix if the state’s bottom line deteriorates between the passage of the budget and the middle of 1996, when the debts are due.

Wilson and most Republican legislators support a version that would close any gap entirely with budget reductions. That version has yet to be put to a vote in the Legislature.

The Senate late Monday rejected another measure put forward by Senate Democratic Leader Bill Lockyer. Under that version, a cash shortage would trigger a combination of across-the-board reductions in all programs not protected by the state’s Constitution and an extension of the state’s temporary top income tax rate on the wealthy.

The Constitution protects kindergarten through community college funding and payments on general obligation bonds approved by voters. Everything else--including higher education, prisons, and health and welfare programs--would be subject to the cuts.

To soften the blow, Lockyer wanted to extend the temporary top income tax rates of 10% and 11%, which are currently in effect and otherwise would drop to 9.3% at the end of 1995.

“It is not a tax increase,” Lockyer said. “It is an extension of an existing tax.’

But the Senate leader faced united Republican opposition and was unable even to muster unanimous support from the Democrats under his leadership. The bill failed on a vote of 19 to 18, short of a majority and well short of the 27 votes needed for the required two-thirds majority.

Assembly Democrats are working on a similar bill. But their version deletes the income tax provision and replaces it with a proposal to deny a small-business tax break to certain corporations. The break exempts small businesses from the bank and corporation tax. Democrats want to narrow the exemption so that large businesses with few owners no longer qualify.

“That’s clearly a loophole,” Brown said.

Republicans support repealing the renters tax credit but say that any other tax--new, extended or otherwise--would be unacceptable.

“The various levels of government already are taking 40 cents out of every dollar you earn,” said Phil Perry, a spokesman for Assembly Republican Leader Jim Brulte. “The Democrats want to take even more.”