Deficit Law Uncertainty Casts Pall on State Budget

SACRAMENTO —  California’s rosy economic future as laid out in Gov. George Deukmejian’s state budget proposal could well unravel with sharp cuts in federal funds under the new Gramm-Rudman deficit reduction law, state legislative and congressional analysts said Friday.

Preliminary studies indicate that the Gramm-Rudman measure--which triggers automatic federal spending cuts if Congress fails to meet its deficit reduction targets--could result in California losing more than $250 million in 1986. Under a worst-case scenario sketched out by Democratic Lt. Gov. Leo McCarthy, those losses could escalate to $9 billion over the next six years.

Top economic advisers to the governor said they are confident that a projected $1.16-billion reserve built into the budget will enable the state to weather severe cuts in the new budget year starting July 1.

Not Figured Into Budget

However, they conceded that because of uncertainties in whether the law will be fully implemented, the potential for huge losses in federal aid was not taken into account in formulating their budget or in their long-term spending goals.

“Every day the news out of Washington gives us a different scenario,” said Jesse R. Huff, state director of finance. “I don’t think it’s possible to set aside a pot of money for it. . . . But if the cuts come, the state must have the flexibility to deal with them.”

The Gramm-Rudman law, designed to balance the federal budget within five years, sets a series of budget reduction goals and requires across-the-board cuts in domestic and defense spending if they are not met. The first round of automatic cuts takes effect March 1 and will be limited to $11.6 billion, much less than the $40 billion to $50 billion in cuts that will be required in future years.

However, the key budget-slashing provision in the new statute is being attacked in federal court by the Justice Department on the ground that it is unconstitutional. Moreover, Congress, which is unlikely to meet its initial deficit-cutting goal by the March 1 deadline, could vote to delay or otherwise modify the act.

$15 Billion in Aid Expected

Should the law survive, the federal budget cuts could have widespread impact on many state programs, Administration and legislative sources agree. The state government expects to receive about about $15 billion in federal funds in the next fiscal year. That is above and beyond the $36.7 billion in state spending contained in Deukmejian’s proposed budget.

McCarthy and other Democrats on Friday criticized the governor’s budget proposal for failing to take into account the potential impact of the Gramm-Rudman law.

“As far as I’m concerned,” McCarthy said, “we should be acting as if Gramm-Rudman would take full effect. It’s law now, so we can expect a major impact this year.”

Lois Wallace, assistant director of the Finance Department, said she sees no reason to overreact. The state’s projected $1.16-billion surplus should cushion any immediate cuts, she said, adding that “we have time to plan.”

However, with many expected spending programs left out of the budget proposal, some Democratic lawmakers expressed concern that the surplus may not be sufficient.

For example, Deukmejian has indicated that he may support additional funding to fight AIDS, but he did not include extra money in his budget document for that purpose. The same is true for his plans to construct school facilities.

If history is any indication, the Legislature also can be expected to approve millions of dollars in unbudgeted spending.

‘Little Room to Maneuver’

“There is very little room to maneuver, and so the answer has got to be to cut something else,” said a spokesman for Senate President Pro Tem David A. Roberti (D-Los Angeles).