California may need to borrow over $20 billion next year

SAN FRANCISCO (Reuters) - California may have to borrow more than $20 billion in the coming 2009-2010 fiscal year as it struggles with cash flow problem, a budget watchdog for the state said on Thursday.

In new a report on Thursday, the California Legislative Analyst's Office said the state might need to borrow more than $20 billion, but added the state's credit rating had weakened and it might have trouble raising the cash.

California, the eighth-largest economy in the world, may face another multibillion dollar state budget shortfall despite sealing a landmark deal earlier this year to plug a $42 billion gap, state officials have said.

In April, the California Department of Finance wrote that it expected to borrow $13 billion in cash during the 2009-2010 fiscal year that begins July, and that a lack of cash flow had already caused the state to halt thousands of infrastructure projects.

"California is likely to have difficulty borrowing anywhere close to the needed amounts from the short-term bond markets based on the state government's own credit," the report said.

The report also recommended that the state government be cautious in accepting federal assistance because it might strip state executives of financial and operational authority.

"The difficult decisions to balance the state's budget now are preferable to Californians losing some control over the state's finances and priorities to federal officials for years to come," the report said.

Like other U.S. states, California is battling unemployment amid a deep recession, as well as a financial crisis that has hit credit markets worldwide.

Governor Arnold Schwarzenegger's office is expected to unveil a revised budget plan in May, and it will detail how he would maintain a balanced budget.

"We have been concerned about the issue of cash management for the last year and a half," said H.D. Palmer, a spokesman for Governor Arnold Schwarzenegger's office.

"What is at stake is the state having sufficient cash on hand to pay its bills in a timely manner -- the specter of the state once again having to delay certain payments in order to make sure we have adequate cash on hand to make our priority payments."

The credit market "is considerably more difficult to access than it has been in prior years -- and that's one of the biggest challenges that we face on a cash basis," Palmer added.

(Reporting by Clare Baldwin; Editing by Edwin Chan, Richard Chang)