State Budget Outlook Grows Even Gloomier

SACRAMENTO â€”  Dishing out more bad news to the governor and Legislature, Controller Gray Davis reported Thursday that the state spent $749 million more than it took in during the 1989-90 budget year.

If Davis’ figures stand up--and they were immediately disputed by Deukmejian Administration budget officials--it would mean that the state started the current fiscal year $200 million short of what the governor had counted on to pay for ongoing state services.

That means Gov. George Deukmejian and the Legislature will have to further squeeze state programs--or raise taxes--to make up the difference. Deukmejian already had decided to call the Legislature into a special session next week to take up a package of $1 billion in budget cuts he said are necessary to stave off a deficit in the current budget year.

Underlining the severe problems in the state’s budgetary system, a staff report of a key legislative committee urged the Legislature to create a constitutional revision commission consisting of citizens from outside the political mainstream to rewrite the rules governing tax and budget legislation.

The proposed commission would deal with such politically explosive issues as the tax limits that voters imposed with Proposition 13 in 1978 and the spending requirements of Proposition 98, the initiative approved by voters in 1988 that requires the state to set aside at least 40% of its tax revenues for public schools.

The report, prepared for the Joint Legislative Budget Committee, said lawmakers need to go outside the Capitol for help because the “public has grown somewhat mistrustful of the political process.� It did not suggest possible changes. At the same time, however, the report criticized citizen-backed initiatives that it said “have completely restructured state and local government finance� through “ballot-box budgeting.�

All proposed changes to the state Constitution or the initiative process would have to be approved by voters. “We are aiming for the 1992 ballot,� said Assemblyman Phillip Isenberg (D-Sacramento), the driving force behind the staff report.

As for the more immediate problem, Controller Davis’ report aggravates the state budget problems because fund balances are carried forward from one budget year to the next much the way an individual carries forward a balance in a personal checkbook. A shortage in last year’s budget automatically bounces forward into the current year.

Only beginning-of-the-year reserves, a healthy carry-forward balance and some “new math� accounting rules helped the state avoid a deficit during the budget year that ended last June 30, Davis said.

Even before Davis’ report, budget officials were anticipating that the slumping economy could leave state tax collections $1 billion short this year and produce a shortfall of $4.3 billion or more next year.

The governor’s $55.7-billion current-year budget assumes that the state began the year with $700 million in the bank. Using the new accounting rules, Davis said, the state actually began the year with a balance of $492 million, even though it spent substantially more than it took in.

The disparity arises because of the way money set aside to meet contractual obligations and continuing appropriations is being counted. Under the old rules, such obligations were counted as liabilities. Under the new rules, they are considered assets.

“If my auditors had been permitted to use traditional accounting methods, we would have concluded that the state ended the year with a $53-million deficit,� Davis said.

Davis’ budget numbers were immediately challenged by the Deukmejian Administration.

Cynthia L. Katz, assistant director of the Department of Finance, said Administration officials still believe that the state began the year with a balance of just under $700 million. “We don’t know exactly how he came up with his numbers, but we believe he is wrong,� Katz said.

Katz insisted that the current year’s budget is still in the black, although she acknowledged that the governor’s onetime reserve of $1.3 billion has now been whittled down to $241 million.