Oct. 9 (Bloomberg) -- California’s revenue collections trailed its forecasts by $1.1 billion during the first three months of the fiscal year, showing new deficits are emerging in the budget Governor Arnold Schwarzenegger signed July 28.

Revenue was 5.3 percent less than was assumed in the $85 billion annual budget during the three months ended Sept. 30. Income tax receipts led the shortfall, as unemploymentreached as high as 12.2 percent in August.

“Revenues more than $1 billion under estimates and recent adverse court rulings are dealing a major blow to a budget that is barely 10-weeks old,” Controller John Chiang said in a statement. “While there are encouraging signs that California’s economy is preparing for a comeback, the recession continues to drag state revenues down.”

The latest figures show that California is facing resurgent fiscal strains brought on by the U.S. recession. Since February, Schwarzenegger and lawmakers have cut $32 billion from spending, raised taxes by $12.5 billion and covered $6 billion more with accounting gimmicks and borrowing.

The budget news comes as the most populous U.S. state prepares to sell as much as $15 billion of bonds in the next nine months to refinance debt and fund public-works projects.

California, already the largest borrower in the municipal market, may offer as much as $4 billion of debt during the week of Oct. 26 to refinance the bonds used by Schwarzenegger to cover previous budget deficits. The budget enacted in July would allow the sale of as much as $11 billion more of general obligation bonds through the June 30 end of the fiscal year if financial markets allow, state Treasurer Bill Lockyer said. The exact sale amount hasn’t been decided.

‘Wait and See’

“If the market is inhospitable, we won’t go,” Lockyer said in an interview. “We’ll just have to wait and see how the feelings are when we get ready to think about it again.”

Additional bond sales by California, the largest municipal borrower, would follow an offering of $4.1 billion of general obligation bonds this week. The state was forced to scale back the size of the deal by almost $400 million as benchmark yields for state and local government debt rose the most in almost four months. The yields climbed after a rally in the tax-exempt market last week pushed them to a 42-year low.

U.S. Treasuries also fell, sending two-year notes toward their first weekly loss since the period ended Sept. 18. Federal Reserve Chairman Ben S. Bernanke said the central bank is ready to tighten monetary policy once the outlook for the economy improves.

“It turned into a bad week for bonds,” Lockyer said. “This seemed to be a very hard week with some headwinds for issuers.”

$22 Billion

California, a state that’s been among the hardest hit by the recession, had already issued $22 billion of debt since March, including $8.8 billion of notes that provided the state with an advance on taxes collected next year.

Lockyer said California still has room to borrow. The state could have sold the entire $4.5 billion bond issue it planned this week were it willing to offer a higher interest rate. Lockyer said he didn’t want to do that.

Even after increasing what it would pay, California still borrowed more cheaply than during previous offerings. A taxable California bond maturing in 2039 yielded 7.23 percent this week, down from a yield of 7.43 percent during a sale in April.

“Everybody thinks there’s still an appetite for California bonds,” Lockyer said. “There’s certainly a continuing need for long-term investments in schools, high-speed rail, stem-cell research centers and so on.”

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

Last Updated: October 9, 2009 20:48 EDT