California's Diverse Economy Being Challenged by Deficit and Drought

CALIFORNIA needs rain, but the only storm clouds overhead are severe budget woes. Even if things go well, incoming Republican Gov. Pete Wilson's proposed $55.7 billion 1991-92 budget will spend $7 billion to $10 billion more than the state takes in over the next 18 months.

But things are not going well.

``This is the Golden State, the diverse-as-you-can-get economy that's supposed to be recession proof, on the cutting edge of Pacific Rim trade,'' says Sherry Bebitch Jeffe, senior associate of the Center for Politics and Policy at the Claremont Graduate School. ``And we are in dire financial straits.''

The problem is tax revenue - lower in the short term because of recession, war, and a four-year drought that is worsening. Long term, the problem has been growth in demand for public services. Six million people came here in the 1980s, straining public assistance, health, primary education, and prison allotments.

``At once victims of our dream of making the desert bloom, we are being buffeted by national events and the vagaries of nature,'' adds Dr. Jeffe.

Governor Wilson is tackling the budget problem as one of structure. That means finding ways of unlocking constraints on money earmarked by ballot-box initiatives and spending limits going back to the Proposition 13 tax revolt of 1978.

One of these is Proposition 98, a 1988 initiative that gave education first priority on 41 percent of the state's general funds. Wilson also has his eye on renters' credits, programs for the homeless, and welfare.

Last week the first of Wilson's revenue-raising plans barely squeaked by a Senate committee amid Democratic cries that the proposed sales taxes on candy, snack food, newspapers, and other periodicals will not dent the budget problem.

Meanwhile, the state was served notice by Standard & Poor's credit-rating service that its ``too rosy'' estimate of incoming revenue may result in a downgrading of California's highly valued AAA bond rating.

``That could cost the state millions upon millions over the long term,'' says legislative analyst Elizabeth Hill. Ms. Hill admits her own estimate of the state's revenue shortfall of $9.9 billion does not account for the current drought's possible impact on agriculture.

And Thomas Hayes, director of the State Department of Finance, has publicly admitted his $7 billion shortfall estimate was based on no military confrontation in the Gulf and a peaceful conclusion by May.

But the state is not without its optimists. Several leading newspapers say Wilson's political and dealmaking savvy far exceeds the ``zero-level'' achieved by his Republican predecessor, George Deukmejian.

Most agree that the depth and duration of the recession and the Gulf war are keys. Many see hopeful signs where others see possible problems.

``The California economy is too diverse not to bounce back from this,'' says Joel Kotkin, senior fellow at Denver's Center for the New West.

``War itself will boost the sagging aerospace/defense industry in southern California, to name but one bright spot,'' Dr. Kotkin says.