Schwarzenegger urges lottery bonds for budget

By Jim Christie

SACRAMENTO, California (Reuters) - California Gov. Arnold Schwarzenegger unveiled on Wednesday a revised $144.35 billion budget plan for the state's next fiscal year that proposes using state lottery revenues to back bonds whose proceeds would help close a $17.2 billion shortfall and build a rainy-day reserve.

California could raise up to $15 billion by selling the debt, which voters would need to approve, the governor said.

The forecast deficit for California's 2008-2009 fiscal year beginning in July includes provisions for a $2 billion reserve proposed by Schwarzenegger, while he expects $5.1 billion in proceeds in lottery revenue bonds next year and $12.6 billion in spending cuts to balance the state's budget.

The Republican governor ruled out new taxes in his plan but proposed a 1 percent increase in the state's sales tax to build a "Revenue Stabilization Fund" reserve through June 2011 should voters reject his lottery debt plan.

Schwarzenegger had previously urged lawmakers to lease California's voter-approved lottery to the private sector in anticipation a private company could improve its revenues and lower the state's costs to operate it.

His latest lottery proposal caught credit ratings analysts by surprise because it would allow California to sell debt in part for deficit financing. Schwarzenegger in 2004 rallied voters to support a measure authorizing the state to sell up to $15 billion in general obligation Economic Recovery Bonds whose proceeds could be used to fill budget shortfalls.

"It shows the strain the state is under," said Bob Kurtter, a managing director at Moody's Investors Service.

State Treasurer Bill Lockyer in a statement said he had concerns about the lottery proposal because it is a "sizable bet that Californians will double their current level of lottery participation within a few years."