California Faces Worst ‘Cash Crunch,’ Davis Warns : Government: Checks in last-minute tax returns fall far short of projections. But a Finance Department official says it’s too early to judge situation.

SACRAMENTO — With the huge rush of checks received in last-minute April tax returns falling far short of projections, Controller Gray Davis warned Wednesday that California soon will confront the worst “cash crunch” in the state’s history.

Davis said the state, facing a $4.5-billion to $6-billion revenue shortfall, is running out of money, creating a “real risk” of not having enough cash to pay its bills toward the end of the fiscal year on June 30.

The controller, who is responsible for paying the state’s bills, said he sent a letter Wednesday to Gov. Pete Wilson calling on the governor to take action needed to enable the state to borrow money so that it can pay its workers and vendors in June without having to issue registered warrants, or IOUs.

“The economy is not growing and generating revenues anywhere near the pace Gov. Wilson predicted,” Davis said in an interview. “I can say we are facing the worst cash crunch in the state’s history.”

The Wilson Administration, which will report May 10 on revenues received in April and present a revised budget for the next fiscal year later in May, declined to comment on the warning issued by Davis, a Democrat who is running for the U.S. Senate.

“It’s too soon to tell” how bad the cash situation will be, said Cynthia Katz, assistant director of the Department of Finance.

Although the state has ended the past two fiscal years with deficits, it has been able to meet the payroll and pay its bills by borrowing internally from special funds. This year, Davis warns, there will not be enough money in those funds to overcome the estimated shortfall.

“We are paying the price for years of rolling over our debts,” Davis said.

Davis, who has been the most pessimistic of all the state’s financial officers, said his earlier analysis was confirmed by the shortfall evident in the Franchise Tax Board’s processing of the April returns.

The board reported Wednesday that checks totaling about $2.7 billion have arrived with personal income tax returns so far in April. Another $717 million has come from employers who withheld the money from their workers’ paychecks. Just under $400 million has been sent out in tax refunds.

The net result is an addition of a little more than $3 billion to the state’s coffers from the personal income tax so far this month.

“Clearly, the envelopes with all the money in them have been opened,” said Jim Reber, a spokesman for the board.

Reber said some late returns may yet arrive in April, and some taxpayers every year send their checks by accident to the location that is supposed to process refunds. Receipts from withholding come in steadily and are counted separately.

For the fiscal year, the personal income tax now has brought in $14.4 billion, with another $2 billion projected for May and June. Originally, the governor expected the tax to produce $19.3 billion for the year.

The personal income tax accounts for a little less than half of the state’s general fund revenues. The other major sources--the sales tax and the bank and corporation tax--also are coming in short of Administration projections.

If revenues fall between $4.5 and $6 billion short of original projections as Davis predicts, the state will deplete its reserve and end the year with a deficit of about $4 billion--more than double what Wilson projected in January.

Kevin Scott, executive director of the bipartisan Commission on State Finance, said his agency also now sees a deficit in the neighborhood of $4 billion.

“We have moved to the pessimistic end of the range we forecast in January,” Scott said.

The state’s fiscal crunch does not end with this year’s deficit. Even if the economy turns around soon, the state is expecting to be at least $3 billion short of what would be needed in the next fiscal year to continue services at their current levels and keep up with anticipated growth in school enrollments, prison populations and welfare caseloads.

The state Senate’s Budget Committee, meanwhile, approved a spending plan Wednesday that is more than $700 million higher than the budget Wilson proposed in January. The difference stems from the Senate’s refusal to repeal the renters tax credit, as proposed by Wilson, and its adoption of a welfare reduction plan less severe than the one proposed by the governor.

The budget is expected to win approval on the Senate floor today, setting the stage for an Assembly-Senate conference committee and negotiations between Wilson and legislative leaders from both parties.

In another development, California’s fiscal management was rated 46th of the 50 states by Financial World Magazine. The publication ranked the states based on their ability to accurately predict revenues and expenditures, balance their budgets, avoid the use of temporary “Band-Aid” measures, keep a healthy reserve and maintain a strong bond rating.

Douglas A. McIntyre, president of Financial World, said the state’s poor ranking was due in part to a number of ballot measures passed by California voters, which he said have “hamstrung” elected officials in their efforts to manage the state.

“It’s very difficult to manage the state when you have to work with so many restrictions in the way you deal with your finances,” McIntyre said.