SACRAMENTO – Odd as it may seem, an unprecedented plan to close part of the state budget gap with a $10.7 billion bond paid off over five years is not regarded by state officials as legally going into debt.

The bond is the centerpiece of a budget agreement scheduled for a vote tomorrow in the Senate. Backers hope the plan will break a deadlock that has left the state without a budget since the new fiscal year began July 1.

If it were considered debt, then the bond might have to be put on a statewide ballot under a 19th-century provision in the state constitution that requires that debt of more than $300,000 be approved by voters.

A conservative organization, the Pacific Legal Foundation, is warning it will file a lawsuit if the Legislature tries to issue a $10.7 billion deficit bond without voters' approval.

Lawyers at the foundation have researched the issue and think the bond is clearly debt and should be placed before voters on the Oct. 7 ballot to recall Gov. Gray Davis or on the primary ballot in March.

"Giving politicians this new tool – the red-ink option – for funding their wish lists threatens to put the state on a fast track to bankruptcy," said Harold Johnson, a Pacific Legal Foundation attorney.

Much like a homeowner obtaining financing through a mortgage, long-term bonds are usually issued to pay for school construction, water facilities and other infrastructure projects.

Under the proposed budget, long-term bonds would be used for the general operating costs of government for the first time in the modern history of California.

Johnson also contends another provision in the state constitution limits major state debt to paying for a "single object or work," not the general operations of government.

During a budget crisis a decade ago, Gov. Pete Wilson, a Republican, warned against "Washington-style" deficits as he pushed through tax increases and spending cuts in an attempt to close a huge state budget gap.

As the gap persisted, he was accused of inflating revenue estimates and taking steps later found to be illegal, such as the use of pension funds. But Wilson never proposed long-term bonds to close the budget gap.

As recently as last fall, nonpartisan Legislative Analyst Liz Hill was skeptical when asked about using long-term debt to close the budget gap, pointing in part to the debt limit cited by Pacific Legal Foundation.

But as Davis likes to point out, it was conservative Republican legislators, opposed to a tax increase, who first proposed long-term debt to close the budget gap this year.

The Republicans argue that a $38 billion shortfall accumulated over several years is too big to pay off in one year. Even with the proposed $10.7 billion bond, the Senate plan would still leave an $8 billion shortfall next year.

Davis' Department of Finance said the proposed deficit bond was carefully studied for several months by Attorney General Bill Lockyer's staff and outside bond counsel, Orrick Herrington & Sutcliffe.

The main conclusion is the bonds are not a debt because the state is not authorizing a long-term obligation. Payments for the five-year bond must be appropriated each year by a two-thirds vote of the Legislature.

"Thus, because the bonds are payable only if an appropriation is made for that purpose, the bonds are not a legally enforceable debt, and thus not a debt for the purposes of the constitutional debt limit," the attorney general said in a letter May 29.

Johnson said the Pacific Legal Foundation regards the argument that the bond is not a debt as "legal fiction" that should be tested in the courts.