External borrowing could be the remedy for California gap, Gov. Wilson proposes.

SEATTLE -- Gov. Pete Wilson of California last week proposed paying off a $2.7 billion deficit with a borrowing from sources outside the state government that would be repaid over 18 months.

Wilson's proposal, announced Thursday when the state Department of Finance released its May budget revisions, would rely on existing statutes to support the legality of the loan.

A revenue anticipation warrant is one of the options being considered, said H.D. Palmer, an assistant finance director.

Unlike other California short-term instruments such as notes, the maturity on a warrant issue can cross fiscal years, Palmer said.

"It is an option that's out there and has been tested" through a previous sale, Palmer said.

To provide security for whatever final structure the loan takes, Wilson would seek proposed legislation requiring monthly deposits of existing sales tax revenue into a special account, which would be dedicated solely to paying off the loan.

That special account would have "a priority call on revenues" subordinate only to state education and general obligation bond payments, which are constitutionally protected, Palmer said. Under Wilson's proposal, the deficit loan would be repaid in chunks rather than redeemed entirely at maturity.

About 60% of the loan, or $1.6 billion, would be repaid in fiscal 1994, which begins July 1, according to the plan. The balance would be paid off by Jan. 1, 1995.

It was still unclear Friday how a deficit borrowing might affect a $2 billion revenue anticipation warrant sale to cover a cash shortfall scheduled for late June, Palmer said, adding that the handling of the sale could depend on whether the state gets a new budget ready by mid-June.

State Treasurer Kathleen Brown also has suggested a deficit borrowing plan, possibly with security provided by a half-cent sales tax increase scheduled to expire June 30.

A spokeswoman for Brown said the treasurer wants to study the latest budget figures. Brown plans on Monday to discuss her idea for a deficit borrowing, the spokeswoman said.

Brown recently said the state's accumulated deficit might be closer to $4 billion if off-book loans to schools are included.

On Friday, Palmer insisted that the temporary sales tax increase "is going away on June 30." Some observers have suggested that Wilson might give in on the sales tax extension in exchange for other concessions, but "he's not going to do it," Palmer said, adding that those rumors should be "put to rest."

Wilson instead called for a special statewide election on Nov. 2 that will allow individual counties to ask voters whether they want to raise local sales taxes by up to one cent. Wilson has suggested that such increases could help offset the impact of California's decision to divert certain local property taxes to schools to help balance its own budget.

Wilson's May budget revision, which sets the stage for final negotiations over the fiscal 1994 spending plan, continues to propose a $2.6 billion property tax shift from local governments to schools.

But in one major change designed to give localities more flexibility, Wilson said the state should repeal all mandates on local programs -- except those tied to public safety -- unless specific funding is provided by the state.

The May revision showed California with a $2.7 billion deficit at June 30, or $238 million above the Finance Department's January estimate. The governor's general fund update now estimates expenditures at $41.1 billion in the current fiscal year, declining to $38.2 billion next year.

Although the general fund update is always tracked closely by municipal analysts, other details provided in the May revisions may actually prove of even greater interest in public finance circles.

For example, Wilson provided the most specific details to date on how he believes the $2.6 billion tax shift should be reallocated among local agencies.

Wilson has backed off on transferring $300 million from redevelopment agencies to schools. "The administration no longer views this level of revenue transfer as a realistic target, given the ability of redevelopment agencies to protect tax increment revenues by expanding bonded debt levels," says a Finance Department document on the May revisions.

Wilson now proposes instead that redevelopment agencies be required to transfer $65 million overall in property tax revenues annually to schools. That amount equals 15% of these agencies' support and administrative expenses in fiscal 1993.

The administration also would support legislation to reform redevelopment law and practices, with the goal of strengthening powers to address the most serious forms of blight while substantially limiting redevelopment as a financing mechanism for developing non-blighted areas. State legislators are currently studying reform bills to refine the definition of blight, along with other redevelopment reforms.

The rest of the $2.6 billion local government tax shift would generally be allocated in proportion to the bailout assistance given to local agencies in the wake of Proposition 13, the state's 1978 tax limitation initiative.

Wilson proposes shifting about $1.2 billion from counties, $245 million from cities, and about $1 billion from certain special districts.

The May revision proposes maintaining property tax allocations for independent fire districts, transit districts, and hospital districts. But all other property tax revenues currently allocated to special districts, estimated at $1 billion, would largely go to counties instead.

"The purpose of this proposal is to give county officials substantially more responsibility and flexibility to determine relative funding priorities for competing local and countywide services, as well as to encourage consolidation of duplicative entities," the Finance Department said. "Toward that end, the administration also would support legislation to facilitate the process for consolidation special districts."

The proposed county revenue loss of $1.2 billion from the shift already factors in the $1 billion gained from special districts under Wilson's plan.

Wilson's scheduling of a special election also has broader ramifications because proposals that are already qualified for next year's June 1994 ballot will now appear in November instead.

That means a proposal to lower the approval requirement for local general obligation school bonds to a simple majority, rather than two-thirds, will be voted on this fall.

And a so-called school choice initiative will also now appear on the Nov. 2 ballot. The initiative would permit parents to obtain funding vouchers from the state for children enrolled in private or parochial schools.

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