LOS ANGELES -- As California's cash crisis continued to escalate, state Treasurer Kathleen Brown this week proposed to eliminate a $3 billion budget deficit by taking the unprecedented step of issuing five-year revenue bonds.

Approval of legislation to create a state authority to conduct the deficit borrowing would not negate the state's need to sell a record-size $6.9 billion of revenue anticipation notes on July 20, Brown said.

The Rans, which would be issued in fixed- and variable-rate modes, would mature next April and June and meet the state's short-term cash management needs.

Moreover, Brown said the state probably would need to issue $3.3 billion of revenue anticipation warrants next February if legislators approve a fiscal 1995 budget based on expectations of receiving federal dollars for immigration services. The warrant sale would hinge on whether that money would arrive. The warrants, whose maturities can cross fiscal years, would mature in September 1995.

In addition to mapping plans for short-term financings for the fiscal year beginning July 1, Brown is drafting legislation to create the California Economic Recovery Authority, responsible for overseeing a proposed restructuring and elimination of the deficit.

The authority would disappear as soon as the bonds are paid off," a Brown press release issued Tuesday said.

"The bonding out of the accumulated deficit gives California a onetime opportunity to bring its future budgets under control without worrying about prior years," the release said.

Brown, a candidate for the Democratic gubernatorial nomination, timed her announcement only days before the long-planned release of the May state budget revisions by the state department of finance, which is closely aligned with Republican incumbent Gov. Pete Wilson.

The May revisions, scheduled for release tomorrow, set the stage for final legislative negotiations over the fiscal 1995 spending plan.

At the heart of Brown's bond proposal is an attempt to throw doubt on the lynchpin of Wilson's budget strategy, which is an assumption that the federal government will provide $3.1 billion to pay for immigration-related reimbursements as well as certain health and welfare hikes.

Brown ridiculed the notion that the entire $3.1 billion would be released to California, saying in a release that "Pete Wilson's budget is a lie.

While she supports the request for more federal funds, Brown said in the release, "It is fiscally irresponsible to attempt to balance our state's budget merely on hopes and prayers." The release said no other governor "has submitted a budget balanced on the assumption of receiving federal funds."

In response, H.D. Palmer, an assistant director with the state finance department, said Brown should "join with the governor and the bipartisan leadership of the legislature to secure this reimbursement from Washington."

Her other option, Palmer said, is to "put forth a specific budget plan that details which taxes on Californians should be increased, or which programs should be cut, to absolve the federal government of its financial responsibility to California."

Analysts for three rating agencies yesterday reacted with cautiously favorable comments about Brown's deficit borrowing proposal.

"One advantage with longer-term borrowing is you don't have to re-enter the credit markets every year," said Steven G. Zimmermann. the managing director of the Western region office of Standard & Poor's Corp. "But it is just one way to stop the hemorrhaging. You still have to deal with the problem of balancing the budget" in future fiscal years.

Brown's multiyear bond strategy "would be an excellent idea," said Fitch Investors Service vice chairman Claire G. Cohen. "It would reliquefy the general fund and clear off a liability from their books."

The Brown release said selling bonds "would end three years of red ink and move California solidly into the black." The release said the bond issue would lower the amount of short-term notes needed to be sold, "thus saving the state over $200 million [in interest costs], and repair our credibility on Wall Street."

A Brown spokeswoman said interest costs on the five-year bonds would total $422 million, while "the interests costs of continuing to roll over the $3 billion deficit for five years is $636 million. If we muddle around and don't eliminate the deficit, it costs taxpayers more."

Last year, Brown proposed a deficit borrowing plan with the security provided by a half-cent sales tax that was set to expire. The sales tax ultimately was extended, but proceeds went to local governments. Brown's multiyear bond issue proposal "is an alternative that has proven to be quite successful" in Massachusetts and Connecticut, the spokeswoman said.

"From a rating agency perspective, a long-term deficit borrowing makes sense," said George W. Leung, managing director of state ratings for Moody's Investors Service. Moody's "would need to get comfort" that the state is able to obtain "a long-term fix through a deficit borrowing. Otherwise, this is simply the first of many deficit borrowings."

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