Budget Gap Widens in California

Golden State faces largest shortfall in nation; governor pushes 'structural reforms'

CALIFORNIA'S budget woes have become so acute that even if the state were to empty all its prisons, close the university system, and lay off all state workers it couldn't meet a shortfall projected for the next 16 months. The purveyor of this recent gloomy news wasn't some legislative backbencher or lobbyist trying to make a point. It was the state's chief executive, Gov. Pete Wilson (R).

Staring into the klieg lights at a recent press conference, he declared that the state's budget problem - now projected to be nearly $13 billion for the rest of this fiscal year and the next - has become an "emergency."

A political nudge

There was a political element to Mr. Wilson's confessional. By forthrightly pointing out the problem, he hopes to goad the Democratic-controlled state Legislature into moving up its timetable for dealing with the new state budget and addressing the "structural" reforms and other ideas he has been advocating.

At the same time, by being blunt, the governor may buttress his position with the public when the give-and-take over taxes and spending cuts gets under way in earnest. Even so, his recent statement also underscored the depth of the financial plight facing the nation's most populous - and, in theory - richest state.

"No one now faces a bigger problem in fiscal year 1992 than California," says Tony Hutchison, an analyst with the National Conference of State Legislatures (NCSL).

In the gauzy aftermath of the Persian Gulf war, many states are getting down to the messy task of trying to balance budgets. At least 31 states face deficits this year. Next year doesn't look much better.

Brookings Institution economist Henry Aaron says he believes the state and local budgetary strains could turn out to be the worst since the Great Depression. Conservative analyst Kevin Phillips says it is shaping up "as one of America's biggest challenges of the '90s."

Few states are enacting tax increases to deal with the budget gaps. Indeed, a new NCSL survey out this week shows that fewer than a dozen states have enacted or are seriously considering major tax hikes. Most are cutting millions from welfare, education, and other programs or putting off capital investments - a testament to how strong the antitax mood still is across the land.

What increases are being proposed are usually on "sin" taxes - alcohol and tobacco - or on gasoline or sales taxes. A few are considering levies on telephone calls. California and New York are looking at taxing "snack foods."

There are exceptions. At least two states that don't have income taxes - Connecticut and Tennessee - are thinking of adopting them. Most states, though, have yet to decide how they will balance their books.

Elements of a shortfall

Like other states, California's red ink stems in part from recession, which reduces revenues coming in, and a decade of federal-program responsibilities being shifted to the states, which increases funds going out. The drought and freeze have contributed to the state's fiscal problems as well.

Then there is what Governor Wilson likes to refer to as the "structural" deficit. State budget officials point out that since 1985 spending for prisons has increased 200 percent, welfare 115 percent, and public schools 70 percent. During that time, however, the population has grown only 20 percent and general tax revenues 60 percent. Thus the governor insists a fundamental gap remains between revenues and expenditures.

The result is what state officials are now projecting will be a $12.6 billion shortfall for the rest of this year and fiscal 1992 - up from a $7 billion estimate in January. That is the equivalent of about 20 percent of the current budget.

In coping with the yawning gap, state leaders have little room to maneuver. As much as 85 percent of the budget is off limits to the governor, mainly because of program mandates or voter-approved initiatives.

One of Wilson's major thrusts is to try to build flexibility into the system.

To do this, however, he will have to convince a chary California public that he and the Legislature can be trusted to handle the taxpayer's money.

Democratic opposition

He will also have to overcome some formidable Democratic opposition. A principal goal of his long-term budget-reform drive is to suspend Proposition 98, a voter-approved initiative that guarantees funding for education, the biggest state outlay.

California teachers are waging a multimillion-dollar campaign to stop him - and are calling on Democratic lawmakers to support them.

"Prop. 98 has become the line drawn in the sand," says Sherry Bebitch Jeffe, a political scientist at the Claremont Graduate School.

Wilson will also run into Democratic opposition if he tries to cut too deeply into social welfare programs. As for taxes, he has said he is willing to expand the state sales tax to cover such things as newspapers and snacks. In the past he has ruled out an increase in income taxes - another source of friction with his Democratic opponents.

Democratic leaders in the state Assembly and Senate say that, while they are willing to accept some program cuts, the pain will have to be spread around - meaning there will have to be tax increases, too. They are looking at higher corporate taxes and the incomes of the wealthy.

One knowledgeable Democratic legislative aide says the leadership would be willing to accept a 60-40 compromise - 60 percent cuts and 40 percent tax increases to meet the shortfall. He suggests Democrats might give on Prop. 98 if the governor would acquiesce on taxes. Such a move by Wilson, however, would draw the wrath of GOP conservatives in the legislature.

In the next few months Wilson, by nature a compromiser, is going to have his skills tested as never before. After three months inhabiting the job he has always coveted, his is not so much enjoying a honeymoon as trying to avoid a divorce - with the Legislature and public.