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."

"Whatever the merits, there may not be enough time to make the lottery plan part of an immediate budget solution," Lockyer, a Democrat, added.

SALES-TAX ALTERNATIVE

If voters reject lottery bonds in November, Schwarzenegger will ask lawmakers to approve a "trigger" that would temporarily raise the state's sales tax by one cent on every dollar of sales until the new rainy-day fund he wants formed is full or until June 30, 2011, whichever occurs first.

Schwarzenegger told reporters at a press conference in the state capital of Sacramento the sales tax increase would be a last resort to establish a rainy-day fund to capture revenues in good times that could bolster state finances in lean times.

"The cold hard truth is that we cannot continue to run our state like this," Schwarzenegger said, referring to the state's lack of reserve funds.

He also said he supports creating a bipartisan commission to review California's tax system, an effort he said mirrors new Democratic Assembly Speaker Karen Bass' call for an overhaul of the state's tax system, which dates to the 1930s.

Bass and state Senate President Pro Tem Don Perata immediately criticized Schwarzenegger's budget plan, largely because its proposed spending cuts would hit health and human services programs hard.