Oil-backed bonds key to eliminating California deficit, candidate Fong says.

SANTA MONICA, Calif. - Matt Fong, the Republican candidate for treasurer of California, yesterday endorsed a plan to erase the state's $3.7 billion accumulated deficit by issuing deficit-reduction revenue bonds backed by state-owned oil reserves.

The issuance of revenue bonds would immediately generate $500 million to $800 million in revenues earmarked toward reducing the state's annual carryover deficit, Fong said.

Fong was a keynote speaker at a two-day public finance conference sponsored by The Bond Buyer. Democratic candidate Phil Angelides is scheduled to address the group of nearly 400 public finance professionals today. Angelides has said previously he supports Treasurer Kathleen Brown's proposal to issue bonds that would be repaid over five years. Brown, a Democrat, is running for governor.

Fong said his plan differs from Brown's deficit-reduction proposal because it identifies a dedicated revenue stream.

The state's accumulated deficit problem was also addressed by Steven Zimmermann, managing director for the Western region office of Standard & Poor's Corp., which in July downgraded the state.

Speaking on a panel of municipal market participants who focused on California's economic outlook, Zimmermann said that revenues and expenditures are "getting pretty close to break-even" in the current fiscal year, which began July 1. "But we're carrying this baggage from previous years, and there has been no progress in reversing that deficit," he said.

Moreover, "the budget adopted this year made no decision" about how to resolve the deficit, Zimmermann said.

The fiscal 1995 state budget act requires that the legislature employ across-the-board spending cuts if revenues fall short of forecast. The trigger mechanism was demanded by a consortium of international banks that provided credit support for a portion of the state's $7 billion issuance of short-term obligations in July.

The likelihood of the trigger's being pulled this year or next has been increased by a budget-balancing assumption that the federal government will provide unprecedented assistance for illegal immigrant-related costs, Zimmerman said.

"We could see the trigger pulled this year," Zimmermann said. "It is very likely the plug will be pulled next year due to a sizable deficit."

On the topic of the state's economic outlook, Alison Lynn Reaser, a senior vice president and chief economist for First Interstate Bancorp, said, "Our view is that California has finally begun the process of recovery."

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