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State Borrowing Plan Is Unveiled

Finances: Controller says up to $11 billion could be tapped to cope with budget deficit.


SACRAMENTO — Controller Kathleen Connell unveiled a plan Wednesday that would allow the state to borrow as much as $11 billion to avoid an anticipated cash crunch this summer.

The need for the short-term loan traces back to last year's energy crisis.

The state must repay $5.7 billion it borrowed in August to cover a cash shortage triggered when the general fund was tapped for billions in electricity purchases. The $5.7-billion loan comes due in June, the same month the state must pay schools $1.4 billion as part of its Proposition 98 obligation to fund public education.

The combination of big bills and weak tax receipts will leave the state with a cash deficit of $4.6 billion by the end of July, Connell said. She is seeking a cushion of $2.5 billion, bringing the state's short-term cash need to about $7.1 billion.

"We need to make sure we have enough cash to pay our bills," Connell said.

Factoring in the possibility of the need for another $422 million in cash in August, Connell's plans call for the state to borrow $7.5 billion by June 1. The state could tap another $3.5 billion that Connell is recommending Davis authorize if cash flow problems continue into the fall, for a total of $11 billion.

Clouding the state's fiscal outlook is whether lawmakers and Davis will agree on a 2002-03 budget by July 1, the start of the new fiscal year, or whether negotiations will drag into the summer or beyond. Also complicating matters is the sale of bonds to officially reimburse the state general fund $6.4 billion used to cover energy costs.

Connell said she expects the bond sale, which has faced numerous delays, to take place in August. State Treasurer Phil Angelides has not set a date for the sale, however.

Sandy Harrison, a spokesman for Davis' Department of Finance, signaled Wednesday that the governor is prepared to sign off on Connell's plan for the state to borrow $7.5 billion.

"We think this is the right course of action to ensure that the state has the funds it needs in the coming months to provide state services and pay state employees," Harrison said.

Connell's plan calls for the state to issue a revenue anticipation warrant, a type of loan that can be repaid the following fiscal year. She said she expects the deal to cost the state "millions" of dollars in interest and credit enhancements, but she could not give a more specific estimate.

Credit enhancements are a type of insurance policy to guard buyers of debt issued by the state against uncertainties, which in this case are likely to include the state's budget and the energy bond sale. The last revenue anticipation warrant issued by California--for $7.2 billion in 1994--required a credit enhancement that cost $33 million.

Republicans reacted to Connell's announcement by attacking Davis, whom they accused of being slow to respond to the state's growing budget shortfall.

"We have to drag him kicking and screaming to take action of any kind," said Senate Republican Leader Jim Brulte of Rancho Cucamonga.

GOP gubernatorial nominee Bill Simon Jr., speaking to reporters after a speech at the Milken Institute conference in Beverly Hills, said the cash crunch is more evidence of Davis' poor fiscal management.

"It's not just the softening economy," Simon said. "It's the fact Davis waited."

Davis spokesman Roger Salazar replied: "Those are big words from a guy who can't even file his taxes on time."


Times staff writer Seema Mehta contributed to this story.

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