Legislative analyst doubts loans will fly SACRAMENTO Governor's fiscal plan questioned over difficulty in enticing investors and legality of using loans to balance the state budget

Legislative Analyst Mac Taylor displays a copy of his office's overview of Gov. Arnold Schwarzenegger's proposed 2009-10 state budget during a news conference in Sacramento, Calif., Thursday, Jan. 8, 2009.(AP Photo/Rich Pedroncelli) less Legislative Analyst Mac Taylor displays a copy of his office's overview of Gov. Arnold Schwarzenegger's proposed 2009-10 state budget during a news conference in Sacramento, Calif., Thursday, Jan. 8, 2009.(AP ... more Photo: Rich Pedroncelli, AP Photo: Rich Pedroncelli, AP Image 1 of / 3 Caption Close Legislative analyst doubts loans will fly 1 / 3 Back to Gallery

Gov. Arnold Schwarzenegger's plan to use about $10 billion in borrowing to help close an estimated $40 billion state budget deficit over next 18 months could face problems, a new report by the nonpartisan legislative analyst said Thursday.

The governor's borrowing plan faces at least two major hurdles, said Mac Taylor, the state's legislative analyst. Finding investors in a credit market that's in turmoil and a potential legal challenge on whether the state can take out short-term loans to balance the budget each could derail the governor's efforts.

In presenting his 17-page analysis of Schwarzenegger's budget, the legislative analyst said it reflects a good-faith effort to close the state's colossal deficit, but could be improved with less borrowing and more strategic spending cuts and revenue increases.

Taylor also reiterated the urgency of the state's financial plight.

"In November, we used words like dire, bleak and awful and since then the problem has gotten a lot worse," he said. "And we're running out of adjectives."

With California's budget deficit expected to grow to about $40 billion by June 2010, Schwarzenegger and the Legislature so far have failed to agree on how to close the enormous gap that could grow worse.

H.D. Palmer, a spokesman for the state Department of Finance, said borrowing would have to be part of the budget solution, unless there are deeper spending cuts or even higher taxes, proposals that would be difficult to implement in the struggling economy.

"We knew the (short-term loans) would be difficult," he said. "We believe we've put together a comprehensive and balanced plan that closes a historic budget gap."

Last week, Schwarzenegger's aides unveiled a budget that seeks to solve the deficit problem with more than $17 billion in cuts, including reductions in education, health care and welfare payments. The governor also proposed to raise more than $14 billion from new taxes, including a temporary 1 1/2-cent increase in the sales tax.

Schwarzenegger also wants to borrow $5 billion against future state lottery sales and take out $4.6 billion in short-term loans that would be repaid in the 2010-11 fiscal year.

Taylor argued that trying to eliminate about one-quarter of the budget deficit through borrowing could be a problem, especially considering the credit market meltdown. He also warned the $4.6 billion short-term loan proposal could face legal challenge because Proposition 58, passed by voters in 2004, restricts the state's ability to borrow for budgetary purposes.

The legislative analyst also suggested calling a special election as early as late April to ask voters to approve a tax package, as well as revising initiatives that voters approved in previous years so that the state could dip into the money generated by those measures.

Republican lawmakers and Schwarzenegger already have proposed using funds collected by Proposition 63, legislation that Senate President Pro Tem Darrell Steinberg, D-Sacramento, carried to fund mental health care for homeless adults, and Proposition 10, money for children's health care.

Taylor recommended adding to that list Proposition 99, a tobacco tax for health care programs, and Proposition 49, which set aside money for after-school programs, an initiative Schwarzenegger championed in 2002.

The governor and legislative leaders returned to the negotiating table Thursday, meeting in person for the first time in about a month.

Legislative leaders emerging from a 20-minute meeting with the governor said they plan to continue negotiating.

"We are going to work with our Republican colleagues and the governor every day," Steinberg said.

Senate Republican leader Dave Cogdill of Modesto said he expects talks to intensify in coming days and weeks.

"Everyone understands the urgency of the situation we're dealing with and we're going to stay at it," he said.