May 15 (Bloomberg) -- California Governor Arnold Schwarzenegger, saying he can’t raise taxes any more, wants to borrow at least $6 billion to pay bills and to further slash spending to steady the state budget.

His proposal, unveiled yesterday as part of the annual May budget revision, calls for the state to sell $6 billion of revenue anticipation warrants at the start of the fiscal year in July. More short-term borrowing would be needed later in the year, he said, calling for $6 billion to be cut from state programs, mostly linked to schools, colleges and welfare.

The proposals are an attempt to resolve a $15.4 billion deficit, an amount that would swell to $21 billion if voters on May 19 reject a package of budget balancing measures he and lawmakers put on the ballot. The worsening economy is forcing Schwarzenegger to open a new fight over the budget three months after he slashed spending and raised taxes by $12 billion in a failed bid to close what was a record gap.

“To solve our immediate cash crisis, we simply cannot avoid deep and painful cuts in spending,” Schwarzenegger, a 61- year-old Republican, told reporters in Sacramento yesterday. “Some of these solutions are things I would never have considered in the past but, unfortunately, our state could be in a worst-case scenario if the propositions fail.”

Revenue anticipation warrants are a type of cash-flow loan rarely used by municipalities because costs are higher than on more common revenue anticipation notes, which must be repaid in the same fiscal year they are sold. California must sell warrants because it won’t have enough money to repay a loan by the June 30, 2010, end of the fiscal year. The warrants are due two years after issuance.

Unprecedented Borrowing

The proposed cash-flow loan comes after the state’s Legislative Analyst’s Office said in a report May 7 that California will probably need to borrow an unprecedented $23 billion in notes or warrants by October to pay day-to-day bills. If voters approve the budget-balancing measures, the amount would drop to between $13 billion and $17 billion.

California Treasurer Bill Lockyer said such a large loan may be impossible without Washington’s help, given the conditions in U.S. financial markets. If it can’t borrow, Lockyer said the state would be forced to shut off payments to counties and others with whom it does business, just as it did earlier this year when lawmakers couldn’t patch the budget.

Lockyer this week wrote to U.S. Treasury Secretary Timothy Geithner asking that the federal government become a standby purchaser of the short-term loans in the event of default. Such a guarantee would make it easier for states to buy the bond insurance policies needed to attract investors.

Federal Help

Lockyer’s office has estimated that without federal help, $15 billion of notes or warrants would cost California between $500 million and $1 billion in fees and interest.

Schwarzenegger’s finance director, Mike Genest, said he agrees the state may be unable to raise all the money it needs without guarantees from Washington and needs “a big infusion of cash.” California is seeking backing that would allow it to raise money from investors rather than a bailout, he added.

The U.S. House Financial Services Committee has scheduled a hearing for May 21 on four bills related to the municipal bond market, including one establishing a public finance office within the U.S. Treasury to reinsure municipal bonds.

Both Lockyer and the chairman of the committee, Democratic Massachusetts Congressman Barney Frank, have said such legislation might not arrive in enough time to help California. Frank said Geithner already has the authority to use the Troubled Asset Relief Program to back cash flow notes.

Legislation

California’s full faith and credit pledge is rated A by Standard & Poor’s and an equivalent A2 by Moody’s Investors Service, five grades below the top investment ranking. California is the lowest rated U.S. state.

Besides the $6 billion of warrants, the budget revision anticipates $6 billion of spending cuts and $1 billion in higher or accelerated payment of fees. It also seeks to raise another $1 billion by privatizing a portion of the State Compensation Insurance Board, which provides workers’ compensation insurance to California companies.

Schwarzenegger’s proposal includes plans to fire 5,000 state employees, mostly prison workers and personnel from health and services agencies. The state employs about 200,000 people.

Democrats Anticipate Cuts

The Legislature’s two Democratic leaders agreed on the need for deeper cuts, saying the state’s plight is the result of the global economic slump. Neither dismissed Schwarzenegger’s ideas.

“We have consistently said that all issues must be on the table, so we will closely examine each and every one of the governor’s proposals,” Assembly Speaker Karen Bass, from Los Angeles, said in a statement.

The governor’s revised proposals come less than a week before a statewide referendum on six measures, including one to borrow $5 billion against the proceeds of the lottery, that were hammered out by Schwarzenegger and lawmakers. Polls suggest the key measures are headed for defeat.

If the ballot measures fail, Schwarzenegger said he would siphon off $2 billion earmarked for local governments. That idea drew outrage from officials already wrestling with their own financial troubles, a result of tumbling retail sales and real estate values that depressed tax collections.

Reductions would fall heavily upon police and fire departments that account for as much as 80 percent of city budgets, said Eva Spiegel, a spokeswoman for the League of California Cities. “Cities can’t afford these cuts.”

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; William Selway in San Francisco at wselway@bloomberg.net.

Last Updated: May 15, 2009 11:58 EDT