Debt Payoff Steers State Toward No-Frills Budget

SACRAMENTO —  With Controller Kathleen Connell agreeing Wednesday to pay a $1.36-billion legal judgment, Gov. Pete Wilson and legislators now must turn their attention to fashioning a pared-down budget that will include no tax cuts and few new spending initiatives.

It is now evident, barring an eleventh-hour compromise, that Wilson and many Democrats in the Legislature have decided that a bare-bones budget, in which both sides lose more than they win, is preferable to the alternative: a protracted stalemate with no prospects of a state budget any time soon.

A joint Senate-Assembly conference committee is expected to meet Friday to begin the chore of cutting money from a variety of programs.

The cuts will hit everything from prisons and parks to aid to local government, while Wilson will lose his proposed business, banking and income tax cuts. Meanwhile, the legislative analyst’s office for the first time has raised the possibility that legislators could make budget savings by reducing public school spending--something Democrats are unlikely to do.

The ongoing budget drama comes amid a dizzying series of turns during the past few days, beginning when Wilson ended negotiations with Democrats over California’s month-late $68-billion budget after he concluded that Democrats never would agree to his plan to cut personal income taxes $1 billion.

Had he won the tax cut, Wilson said, he would have been willing to grant Democrats one of their main goals--wage increases for more than 200,000 state employees, who have not received a raise since January 1995.

But when Democrats refused to bend to his demand, Wilson broke off separate talks with the state employees’ pension fund to settle a $1.36-billion debt by paying it off over the next decade, and decreed that the entire bill should be paid now.

That decision, compared to a fiscal “neutron bomb,” effectively removes all extra money from the new budget. Legislators must trim an additional $600 million to bring the budget into balance, as demanded by the state Constitution.

The prospects of reaching a last-minute budget compromise appear faint. The elements of such a deal would require Wilson and the Democrats to give on positions such as the tax cut, school funding and pay raises for state workers that appear encased in hardened concrete. Those involved in the negotiations, which ended last weekend, say neither side is willing to hammer away any longer and that it is time to move on.

The legal judgment stems from a lawsuit by the Public Employee Retirement System over a budget-balancing scheme during 1992 and 1993 in which Wilson and legislators delayed payments into the pension fund.

For a few hours Wednesday, lobbyists for labor unions, local government and others with a stake in the 1997-1998 state spending plan held out hope that they could reopen budget talks and negotiate for extra money.

They had been encouraged when Connell held a news conference early in the day to announce that she was delaying making the pension fund payment. Her reason: Wilson had failed to deliver a letter to her properly stating that he was certifying that the money had been appropriated.

Holding out hope that they might wrest money from Wilson for state worker raises, representatives of several unions scrambled to make offers that they hoped would meet the governor’s demands.

Among their offers, union lobbyists said they would agree to Wilson’s original plan to settle the retirement system lawsuit by structuring a 10-year payment schedule and waiving $650 million in interest on the debt in exchange for an extra $700 million in retirement benefits.

But the Wilson administration shut down the Capitol hallway talks when finance Director Craig Brown held a news conference to say that although the letter Connell requested was not necessary, he would send one anyway.

“She asked for certification. She got certification,” Brown said.

Connell replied a few hours later.

“I am paying it,” she said. “I think it’s unfortunate that we’ve come to this state in the political process.”

Connell’s payment was for slightly more than $1.2 billion, with the rest to come later. The state still owes $300 million in interest--a sum that has grown by $20 million since the judgment was affirmed in May and Wilson set about trying to negotiate a settlement, said Patricia Macht, spokeswoman for the retirement board. Legislators must make a separate appropriation to pay off the interest.

“Hopefully,” Macht said, “it will make pension raids not an endangered species, but extinct.”

Any effort to scuttle what appeared to be the final piece in this year’s budget deal seemed to evaporate when Connell said the money would be transferred to the retirement system by the end of Wednesday.

“We are cleaning up the wreckage and trying to salvage as much as we can of some pretty valuable programs,” said Assemblyman Wally Knox (D-Los Angeles), a labor lawyer who had been struggling to find a way to block the immediate payment.

The news that Connell had transferred the money left union lobbyists and their members dejected.

“What can you say?” said Chris Voight, who represents state scientists, attorneys and administrative law judges. “The chance of coming up with a long-overdue pay raise this year is remote. Our members have worked without a raise for 2 1/2 years. They haven’t whined about it. They won’t whine about it. We’re extremely upset, but we have a job to do and we’ll do it.”

The Department of Finance and legislative staff members conferred in an effort to come up with lists of programs to trim and eliminate in order to draft a scaled-back budget.

One of the most detailed lists came from the legislative analyst’s office. The analyst made no recommendation about the wisdom of any of the cuts but did offer suggestions.

Among the hardest-hit would be local government. For example, a $50-million program to start a fund to help pay for public works projects is on the hit list. The Legislature’s desire to give strapped counties and cities $280 million also could disappear.

So might a $10-million program to help small counties pay for their court systems, and another $10-million program by which cities receive money from traffic fines.

Various trims and shifts in the health and welfare budget could save $163 million, while such moves in prison spending would save almost $250 million, the analyst’s office said.

Perhaps the most surprising possibility raised by the legislative analyst is that funding for public schools could be trimmed.

By manipulating the complex school funding formula, the analyst’s report noted, legislators could continue funding such popular programs as class-size reduction in the next school year and shave $500 million from the $32-billion school budget and use it for non-education programs.

Legislators, particularly Democrats, will probably give the suggestion a cool reception. Although they know many programs will be cut as a result of Wilson’s plan to repay the retirement system judgment in a lump sum, Democrats took solace knowing that at least school spending would remain untouched.

Sandy Harrison, spokesman for Senate President Pro Tem Bill Lockyer, the Senate Democrats’ main budget negotiator, noted that Democrats rejected Wilson’s tax cut because it would cut into school spending.

“We are still bloody and bruised from our fight with the governor,” he said. “We wouldn’t turn around and go after the schools ourselves.”