Wilson, Top Lawmakers Agree on Budget

State legislative leaders and Gov. Pete Wilson agreed Friday on the terms of a $57.3-billion budget and a related measure that could trigger automatic spending reductions if the state’s fiscal condition worsens over the next two years.

Already late with the budget for the seventh time in eight years, lawmakers immediately began voting on pieces of the multi-bill budget package and planned to remain in session over the Independence Day weekend to complete action on the measures.

The emerging agreement staves off the issuance of IOUs--which was imminent--and appeared to satisfy an international syndicate of banks that will vouch for the state’s credit when it borrows $4 billion this month.

Although final details of the budget deal still needed to be worked out late Friday, agreement on the outline of the accord was struck after a day of closed-door talks in Wilson’s office, during which Democratic leaders conceded, one by one, most of the major points in contention.

The first sign of a breakthrough came late Thursday when the Democrats--Assembly Speaker Willie Brown (D-San Francisco) and Senate President Pro Tem Bill Lockyer (D-Hayward)--said they had abandoned hope of raising more tax revenue with levies on the wealthy or on business.

The Democrats had wanted to extend for at least two years a surcharge that upper-income taxpayers have been paying since 1991 but which is due to expire at the end of 1995.

Meeting Republican resistance, the Democrats then tried to narrow a business tax break that was meant for small companies but also can be claimed by large corporations if they have fewer than 35 owners. Wilson and his GOP allies also rejected this proposal.

The only tax measure to which the Republicans would agree was a bill to postpone for two years the reinstatement of the renters tax credit, which has been suspended since last year. The credit, $60 for individuals and $120 for couples, goes mostly to low-income tenants.

“How many times can you run into a wall?” asked Lockyer, referring to the governor’s steadfast opposition. “The wall wins.”

The Democrats also agreed to higher spending for state prisons and restored several executive branch programs dear to Wilson that a legislative budget committee had deleted.

Finally, in a move that may have sealed the deal, Lockyer said the Democrats accepted Wilson’s longtime desire to deny extra welfare benefits to women who have additional children after they are on the rolls.

Welfare rights advocates were irate that the Democratic leadership would accept this proposal, which has been rejected once by voters and repeatedly by legislative committees. The policy change also is opposed by abortion opponents, who believe it could encourage poor mothers to abort their pregnancies.

“Only in a back-room deal that was not exposed to an open debate could this have been agreed upon,” said Casey McKeever, an attorney for the Western Center on Law and Poverty.

Welfare grants will also be cut 2.3% across the board.

Not at issue in this week’s talks was the level of funding for education, which had been settled. The budget will leave per-student funding at the kindergarten through 12th-grade levels at this year’s sum of about $4,200. Higher education will get a small boost but students in the University of California and California State University systems will be hit with fee increases of 10%.

Speaker Brown said it was going to be difficult to round up the votes needed to pass the budget with a two-thirds majority. Other than doing their duty in a “close to timely fashion,” Brown said, there was little incentive for Democrats to vote for the bill.

“It’s a tough document,” Brown said.

But Lockyer was more upbeat, telling reporters that the Democrats had managed to prevent even deeper cuts in the programs they support.

“We protected health and welfare and education,” he said. “That feels like a victory.”

Senate Republican Leader Ken Maddy of Fresno said the budget agreement was not “one we are going to be proud of,” adding: “It’s bad but it gets us by this year.”

The budget covers only the next 12 months, but it is part of a two-year plan that requires the biggest borrowing in state history--about $4 billion this month and another $3 billion over the next two years.

Jittery about the state’s fiscal future, the banks that will help the state finance the debt demanded a historic standby measure that would prompt either spending cuts or tax increases if revenues come up short. The banks acted after Wall Street investors said Wilson’s hope for a $2.8-billion federal bailout the year after next was not sufficient to ensure that the state could repay its obligations.

After Republicans refused to vote for any bill that included higher taxes, Democrats agreed to a version that calls only for spending cuts. The bill passed Friday on lopsided votes in both houses and Wilson was expected to sign it.

This standby legislation--the so-called trigger bill--is potentially one of the most far-reaching fiscal measures ever enacted in California. If state revenues come up short, as they have in each of the past four years, the bill will set off a chain of events that could produce unprecedented reductions in prisons, higher education, and health and welfare programs without another vote of the Legislature.

“The Legislature and the governor did what was asked of them,” said state Controller Gray Davis. “It was by no means a pleasant task. But they did not flinch. Right now I’m sure there’s a bad taste in people’s mouths. But years from now people will look back at this moment with some pride.”

The trigger bill calls for the controller to prepare an estimate of the state’s cash flow and then, on Nov. 15, determine if revenues and expenditures are tracking with projections. If there is a shortfall of more than 1%--about $430 million--the governor will be required to present a plan to fix the problem.

If the governor and the Legislature deadlock, the bill triggers automatic, across-the-board reductions in all programs not protected by the state Constitution and federal law. Exempted would be kindergarten through community college programs, debt service on outstanding bonds and some payments to local government.

The depth of the resulting cuts would depend on the severity of the cash shortage. A $1-billion shortfall would prompt cuts equivalent to 15% on an annual basis.

Democratic leaders said they do not believe the cuts will ever happen. The first year of the two-year budget plan, they said, is sufficiently stable, and any problem developing in the second year can be addressed when the next budget is debated a year from now.

But Republicans said they believe the trigger bill gives them assurances they have never had before that the budget will not veer too far out of balance.

“It’s time for us to make our books balance,” said Assemblyman Dean Andal (R-Stockton). “I believe it’s a big step forward.”

Contributing to this story were Times staff writers Virginia Ellis, Jerry Gillam and Carl Ingram.