Fiscal Outlook for State Still Shaky : Budget: Some officials say California's new spending plan is based on outdated projections. They predict a recurrence of the same financial problems next year.

By DANIEL M. WEINTRAUB

Sept. 4, 1992 12 AM PT

TIMES STAFF WRITER

SACRAMENTO — Unless California’s economy performs far better than expected, Gov. Pete Wilson and the next Legislature will have to grapple with many of the same financial problems next year that bedeviled them this year, Wilson Administration officials conceded Thursday.

Although the long-term staying power of the budget Wilson signed Wednesday after a 63-day impasse with the Legislature compares favorably with a compromise he fashioned a year ago, the spending plan by no means guarantees an end to California’s repeated fiscal crises.

The budget, for example, addresses the structural imbalance between revenues and spending with deep cuts in higher education and health and welfare services for the poor and holds down the anticipated growth in education spending.

But the $40.8-billion general fund budget relies on a 4-month-old economic forecast that now appears optimistic, and it is balanced with virtually no reserve for emergencies--in a state that has had its share of disasters, man-made and natural.

“If things continue to muddle along and there is not any substantial spring-back in the economy, it’s likely we’re going to continue to have a budget problem next year,” said Steven Olsen, Wilson’s deputy director of finance.

And that’s from the optimists. Some outside the Administration are warning that the future appears far bleaker.

“This is the first day of the next budget crisis,” said Republican Assemblyman Tom McClintock of Thousand Oaks, who uttered those same words in 1990 and 1991 and was right both times. “This budget places us on a collision course with another deficit of a similar magnitude.”

McClintock, one of only four Republicans in the Assembly to vote against this year’s budget and a frequent critic of the governor, gives Wilson some credit--but says the budget doesn’t do enough.

“The governor won some very important reforms, and unlike last year’s budget, some genuine cuts in state spending, for which I applaud him. . . . Is this as bad a budget as last year’s? No,” McClintock said. “But it still is seriously unbalanced, overstates revenues and has no reserve to speak of to act as a cushion.”

Last year’s budget, unlike this year’s spending plan, was agreed to relatively early, with a tentative accord reached before the start of the fiscal year. Wilson, then in his first year in office, struck a deal with Democrats to raise $7.6 billion in taxes and fees and cut programs by $3.1 billion. The final piece of a projected $14.3-billion gap was closed with a collection of shifts, transfers and accounting maneuvers.

That budget was based on a projection that personal income in California would grow by 7.2% in 1992, producing revenue growth of 20%, including the new taxes. The actual income rise was half that. The result was a $4-billion revenue shortfall and a $10.7-billion gap between the money available and the cost of continuing all programs at the same levels, paying off the deficit and rebuilding a reserve.

This year, Wilson took a different course.

He vowed to balance the budget without a tax increase and to minimize the one-time fixes. Indeed, the solution includes no broad-based tax hikes, although several hundred million dollars in fee increases were factored in.

The bulk of this year’s shortfall was closed with spending cuts. Aid to the poor and sick was reduced. The expected growth in school funding was pared. And the state forced cities, counties and special districts to forfeit property tax revenue to help balance the state budget.

As for temporary measures, the budget limits those to the size of the carry-over deficit from last year. The logic is that it makes sense to retire the deficit, which in theory is a one-time problem, with revenue or spending cuts that will last only one year.

The budget, for example, transfers $345 million to the general fund from fee-supported special funds, postpones $278 million in pension program contributions, and anticipates $351 million in federal funds as reimbursement for the cost of providing health and welfare service to recently legalized immigrants.

“The idea is that once you have eliminated the deficit, you should from that point forward have a balance between your revenues and your expenditures,” Olsen said.

If the Administration has correctly projected the health of the economy, then the current fiscal year will end with a tiny reserve of $28 million--minus any amount needed for emergencies in the next 10 months. The budget calls for expenditures this year of $40.8 billion. And the Administration projects that revenues for the year after that will come to $44.2 billion, even after accounting for the removal of a temporary, half-cent sales tax that is due to expire in June.

If that forecast is accurate, the result would be $1 billion in wiggle room for the 1993-94 budget, money that would have to pay for higher school enrollments and expected growth in health, welfare and prison programs.

“It is going to be snug,” Olsen said. “At a minimum, we would be in a position where we would want to make program reductions in order to establish a reserve--the next step we would have to make in order to restore the state’s financial health.”

The problem is that the Administration’s economic forecast, which was completed in May and projected a 7.8% growth in personal income, now appears to be overly optimistic.

The projection foresaw a gradual recovery beginning in the second quarter of this year and building momentum in 1993. Now even the Department of Finance concedes that the economy is not performing up to expectations.

An informal report prepared this week by the department’s economist says that weakness in the national economy is compounding California’s already stumbling business sector.

“Retail sales are soft,” the report says. “Home sales and housing construction are sluggish. Business investment is weak. The aerospace-electronics industry has announced additional cuts in recent weeks. The financial and service sectors are cutting back. It now looks as if the recovery won’t get under way until mid-1993, and that it will take considerably longer than thought earlier to get back to the level of business activity we had at the peak mid-1990.”

All of this clearly puts at risk the budget’s forecast of a 3.2% boost in tax receipts.

First Interstate Bank, for example, forecast in June that personal income would grow by 6.1%, and now is considering revising that downward to reflect the public sector layoffs the state budget cuts are expected to compel.

David Hensley, director of the UCLA business forecasting project, is even more pessimistic.

Hensley believes that for California’s economy to get started on the road to recovery, thenational economy will have to lead the way. Further, California will need an upturn of housing starts and a burst of consumer spending.

His analysis: “The national economy is going nowhere fast. Inside the state, I see no sectors really improving, yet new problems continue to crop up.” He said he expects another 20,000 layoffs in the defense industry in the next 12 to 18 months and little activity in the construction industry.

“With nothing to offset these blows, there is a strong case that the recession will continue the next six to 12 months, I’d say 12,” Hensley said. For 1993, that translates into personal income growth of just 3.5%, less than half the Department of Finance estimate.

But could Wilson have done more to position the state for next year? Probably not. Although Democratic lawmakers agreed in late June to forgo tax increases and to not roll over any of the deficit, the primary reason for the 63-day impasse was Wilson’s attempt to gain a head start on next year’s budget by minimizing one-time fixes and reining in the growth in school funding.

McClintock, for one, believes Wilson should have changed the rules in the middle of the game by announcing in July or August that revenues would be $2 billion short of the earlier forecast.

“There was a great deal of cutting that could have been done or should have been done that was not,” McClintock said.

But Finance Director Thomas Hayes said such a jolt would have made the already embittered budget negotiations even worse.

“At some point you have to stop and say these are the revenue numbers on which we’re goingto base this budget,” Hayes said. He acknowledged that the state’s fiscal health still is below par.

“We still have a ways to go and we will have to keep working on it,” he said.