LOS ANGELES - The California Senate yesterday approved a basic budget agreement, paving the way for a deficit borrowing by the state and a $2.6 billion transfer of property tax revenues from various local governments.

The Senate produced a bare minimum two-thirds vote for budget passage after negotiating into the wee hours Tuesday. The Assembly approved a similar version on Monday. The Senate's action allowed the Assembly to begin working yesterday on trailer bills that actually implement the fiscal 1994 budget.

Many details, including the structure of the deficit borrowing, hinge on language in the trailer bills. The deficit borrowing could total about $2.7 billion and would be repaid over an 18-month period.

Rating agency officials reacted cautiously yesterday to the budget agreement.

In one sense "we're encouraged - it's certainly positive that this much is settled at this date," said Amy Doppelt, a senior vice president at Fitch Investors Service.

But Doppelt said "it's hard to say anything concrete" until the budget package can be studied in depth.

Steven Zimmermann, a managing director at Standard & Poor's Corp., said it is "definitely encouraging" that a budget might be in place before the new fiscal year begins on July 1. Last year, state leaders failed to reach agreement until early September.

Two main issues that bear examination, Zimmermann said, are the state's handling of the accumulated deficit and whether the proposed budget actually provides balance to avoid an even larger deficit in coming months.

But Zimmermann cautioned that Standard & Poor's will need more time to study the details of a final state budget before making any definitive comments.

George Leung, vice president and managing director of state ratings at Moody's Investors Service, said it is encouraging to see a budget framework approved earlier this year.

However, as for "the quality of that agreement, that still bears scrutiny," he said, adding that an overarching question "is whether these fixes work to solve the problem."

Moody's and Fitch rate California general obligation bonds double-A; Standard & Poor's rates them A-plus.

As approved this week by the Legislature, the fiscal 1994 budget resembles in rough form the revised spending plan proposed by Gov. Pete Wilson in May.

This week's agreement calls for $38.5 billion of general fund spending, down from about $41.1 billion in the current fiscal year. The total fiscal 1994 budget is $52.1 billion, a figure that includes federal moneys and other special funds.

Wilson, a Republican, reached a budget compromise over the weekend with leaders of the Democratcontrolled Legislature. The governor agreed to soften proposed welfare grant cuts, while convincing legislators to boost rather than cut prison spending.

The compromise plan essentially keeps kindergarten-to-12th grade funding at existing levels of about $4,207 per student, in part by implementing about $100 million of administrative savings.

The Legislature also agreed to suspend the renters' tax credit for two years, which will produce savings of $415 million in fiscal 1994.

The state budget's affect on local governments will be a key focus for municipal analysts in coming weeks.

In general, "we're very concerned as to how [the state budget] will affect the locals" because of the tax shift, Doppelt said.

The shift of property tax revenues to education purposes helps the state balance its own budget.

This year's faster state budget passage will at least help local governments make their own budget adjustments earlier in the fiscal year, Zimmermann said.

But the state's formula for allocating local property tax shifts among counties will merit close examination, he added.

Under the budget agreement, counties will be asked to absorb $2 billion of the shift; cities, $288 million; special districts, $244 million, and redevelopment agencies, $65 million.

The rating agencies have said previously that counties stand to suffer the most from the shift because they have little revenue-raising flexibility.

Heavy local lobbying, especially from Los Angeles County officials, helped prompt some state senators to reject the budget agreement when it first came up for a vote Monday evening.

The budget agreement attempts to address local revenue concerns by letting counties share in a new Local Public Safety Fund, which will receive moneys from a statewide extension of a sales tax surcharge that expires June 30.

Lawmakers have already approved extending that surcharge through the end of the year. In November, voters statewide will decide whether to extend the surcharge indefinitely.

The sales tax proposal has generated some confusion over whether it takes effect based on a statewide vote or county-by-county results, some Sacramento observers said yesterday.

A spokeswoman for Assembly Speaker Willie Brown said yesterday that the tax surcharge essentially takes effect as long as voters statewide approve it by a simple majority.

By Aug. 1, however, each county's board of supervisors must pass resolutions that ratify putting the surcharge in place.

If a board approves the resolution, that county will share in the surcharge proceeds as long as the sales tax extension is approved statewide by voters. But if a board decided not to ratify the surcharge, that county would not receive the proceeds - even if the measure passes statewide - if the measure failed among that county's voters.

If the measure passes in the county, it would let the county share in the proceeds even if the board falled to ratify the surcharge.

The sales tax surcharge would raise an estimated $1.46 billion for the Local Public Safety Fund if the surcharge is in effect during all of fiscal 1994.

According to the budget agreement, counties also can get relief from the property tax shift by being freed from about $500 million of state-mandated obligations that do not involve public safety.

Meanwhile, the state's deficit borrowing is expected to resemble a proposal put forth in Wilson's revised May budget plan.

The state would finance about $2.7 billion of its deficit with a borrowing that would be repaid over 18 months, with about $1.6 billion paid off in the current fiscal year and the other $1.1 billion paid off by Dec. 31, 1994.

The state is expected to segregate a portion of its existing sales tax revenues to secure the deficit borrowing, details of which will be fleshed out in a trailer bill, a California Department of Finance official said yesterday.

A spokesman for state Treasurer Kathleen Brown said she would reserve comment about the budget agreement until "we get the cash flows" from the Department of Finance. Unanswered questions include when the deficit borrowing will occur, how it will be accomplished, and how it will affect the size of the state's annual revenue anticipation note sale that takes place in mid-summer, the spokesman said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.