Debt Payoff Becomes Key Budget Factor

In a final step toward drawing this year’s state budget debacle to an end, Gov. Pete Wilson called on Controller Kathleen Connell on Tuesday to pay off a $1.36-billion legal judgment, leaving virtually no money for new state spending initiatives.

Connell, who issues the state’s checks, refused to act Tuesday, raising the possibility that she will not immediately pay the debt. She planned an announcement today.

“I don’t know what there is to wait for,” Wilson said, urging Connell at a news conference to pay the debt. “If somebody has got another [budget] offer, they’ve got, I’d say, a few minutes, maybe a few hours, left.”

As Wilson spoke, Assembly Democrats struggled to find some way to block Connell from paying the money and derail what, at least for now, appears to be the last piece in the new budget, already a month past due.

At the same time, legislators on the joint Assembly-Senate budget conference committee were preparing to convene as early as Thursday. Their task: Cut more than $1 billion from the proposed $68-billion budget.

The cuts must come if Wilson gets his way and Connell repays the legal bill in a lump sum. The Wilson administration says lawmakers must make additional cuts to deliver a balanced budget, something required under the state Constitution.

“It will be my intention to provide protection for health and safety issues,” said Senate Budget Committee Chairman Mike Thompson (D-St. Helena). “Anything short of that certainly has to be considered to be put in the pot to pay off the judgment.”

The events came after Wilson concluded that Democratic lawmakers would not agree to his plan to cut personal income taxes by $1 billion. In exchange, Wilson said he would have agreed to one of the Democrats’ top priorities--giving a raise to state workers, who have gone without a wage increase since 1995.

“Very sadly, many worthy programs will not be funded,” said Wilson, who stands to lose money for many of his programs--though the Democrats will lose far more.

As he was publicly proposing the tax cut-pay raise deal, Wilson’s aides were negotiating in private this summer with the Public Employee Retirement System Board to structure a settlement of the $1.36-billion judgment, which stems from a suit by the board in 1994.

That suit alleged that Wilson and the Legislature violated pensioners’ rights by delaying payments into the state’s massive pension fund in 1992 and 1993 in an effort to balance the state budget during the recession.

On Tuesday, Wilson’s finance director, Craig Brown, told the retirement board that its settlement offers were unacceptable, and that the governor was withdrawing from settlement talks.

Wilson said the labor-dominated board was offering a 10-year payoff. But interest on such a deal would total $650 million.

The retirement system board was willing to forgo the interest and instead receive expanded benefits for retirees that would have cost $1.36 billion. The state will save that money by paying off the judgment now, Wilson said.

William D. Crist, president of the retirement system’s board of administration, called Wilson’s action “outrageous,” and accused the governor of breaking off negotiations “unilaterally.”

“He gave a very inaccurate portrayal of the negotiations,” Crist said. “The result is that a lot of cuts, devastating cuts, will now have to be made.”

Although Crist said he is willing to reopen negotiations, Wilson’s announcement Tuesday made that unlikely. The initial payment would be for $1.23 billion, Crist said, with the remainder in interest awaiting legislative action.

The Wilson administration also sent a letter to Connell telling her of the failed talks and urging her to pay off the debt.

However, Assemblyman Wally Knox (D-Los Angeles), chairman of the committee that oversees the retirement system, said Connell may not have the legal authority to issue the warrant without a specific appropriation from the Legislature.

“We got into this by doing some very risky things that proved to be illegal,” said Knox, a labor lawyer. “At a minimum, it would behoove us to stop and nail down where that authority exists.”

When Wilson released his $68-billion budget earlier this year, the spending plan held the promise of everything from a major coastal preservation initiative to a $130-million tax cut for businesses and banks, a bailout of at least $100 million for local government and more than $14 million to combat AIDS.

But with Democrats unwilling to bend to his demand for the personal income tax cut, Wilson opted to scrap those programs and others, and spend all the extra tax money that has flowed into state coffers this year by paying off the retirement board debt.

The decision means that the sole winners in the budget will be public schools. They will receive $32 billion in the new school year, and are benefiting from an unanticipated $2.2 billion in revenue that came to Sacramento this spring after taxpayers filed their April 15 returns.

As a result, there will be more money for class-size reduction, classroom construction and teacher pay raises.

“We have protected education,” said Assemblyman Don Perata (D-Alameda).

But while education funding is about the only victory Democrats appear able to claim in this year’s budget, Assembly Speaker Cruz Bustamante (D-Fresno) insisted that the fight “is far from being over at this point.”

Bustamante said he believes that even if the $1.36-billion judgment is paid, Democrats still intend to secure money in the budget to assist legal immigrants, who stand to lose federal benefits as a result of last year’s federal welfare overhaul. The price tag on the Democratic proposal was pegged at $120 million.

“There will be a lot of programs that will but cut and will not be on the table once this is all done,” Bustamante said. “What I’m saying is, we’ll go in and try to salvage something from the unilateral action the governor has made.”