DEFICIT MAY LOOM FOR DAVIS.

Byline: Doug Willis Associated Press 

Gov.-elect Gray Davis could face a $1.2 billion deficit in his first state budget because of rising spending and lower revenues, the Legislature's chief fiscal adviser said Thursday.

But outgoing Gov. Pete Wilson's budget director, Craig Brown, said the figures cited by nonpartisan Legislative Analyst Elizabeth Hill represent ``a very, very modest adjustment'' in fiscal estimates.

Brown added that he expects the Davis administration will get ``a pleasant surprise'' when revenue estimates are revised again after taxpayers file returns in April.

Brown said his economists and Hill's are traditionally conservative about revenue estimates, and the state's economic situation today looks better than it did at this point last year, before personal income-tax returns brought in more than $2 billion in unanticipated revenues.

``There is a modest reserve (today), and there will be a big surprise in April . . . one way or the other, and my guess is April will be a pleasant surprise,'' Brown said, responding to Hill's formal submission of her economic and budget projections to the Legislature.

Hill's report was cautiously drafted throughout, with mild warnings of possible areas of fiscal trouble or uncertainty.

Hill said her estimates do not take into account California's nearly $1 billion-a-year share of the still-pending tobacco settlement or the estimated $750 million in annual income from Proposition 10's 50-cents-a-pack increase in cigarette taxes.

She noted that the first funds from the tobacco settlement are not expected until June 30, 2000, with half of that earmarked for local governments, and that Proposition 10 funds are ``pretty tightly tied down'' to new health and education services for children.

Davis' transition team, which must submit its $75 billion-plus proposed budget for the 1999-2000 fiscal year to the Legislature six days after Davis' inauguration Jan. 4, did not respond to a telephone request for comment on the report.