As California's budget impasse marches into its second week, bitter battles are raging over whether to raise taxes or chop spending.

But a major piece of the budget solution already has won the support, albeit reluctantly, of most everyone involved: a massive and unprecedented long-term loan to pay for $10.7 billion of a shortfall that officials predict could build to $38 billion in the next 12 months.

Supporters say the bonds would prevent crippling cuts to classrooms, health services and prisons. But some financial experts warn that a budget built around borrowing -- whether it be for a household or a government -- shrugs off accepted financial wisdom and merely postpones tough budget decisions.

Others, including state Sen. Tom McClintock, R-Simi Valley, have blasted the plan as not only fiscally unwise, but unconstitutional.

Still, lawmakers of both parties and Gov. Gray Davis have embraced the borrowing plan as a necessary evil to finance the chunk of the shortfall left over from previous years.

Legislative Democrats and Republicans included the deficit bond sale, along with cuts, in their budget blueprints, though the two parties disagree over whether to anchor the borrowing with a tax increase.

Davis and legislative Democrats are calling for a temporary half-cent sales tax increase to pay back bond buyers over five years. Republicans, in their resolve against new taxes, want to direct revenues to the bonds from the existing sales tax and cut spending elsewhere.

Meanwhile, other borrowing plans have gained acceptance to balance the budget, including selling bonds to make state pension payments and borrowing from future revenues from a 1998 settlement with tobacco firms.

State Treasurer Phil Angelides has said that the totality of the state's proposed borrowing is "beginning to stretch our credibility in the markets ... What you don't want to go down is a road where the lenders see you consistently unable to come to any decision."

Despite support for the plan in the Legislature, others question the wisdom of pushing the state's money troubles into future years.

Even in a time of historically low interest rates, borrowing can be costly and fails to force permanent changes to address a structural imbalance in the system the state uses to fill its coffers, say financial advisers and political critics.

Instead, lawmakers are taking the easy way out and obligating future generations because of their inability to make tough, long-term decisions. It is akin, critics say, to a family running up credit cards to dangerous levels rather than cutting household expenses or seeking a second job.

"That's your first strategy out the door, how to cut costs," said Sacramento-based financial adviser Ellwood Jones of Capital Region Financial Group. "If we can't cut enough expenses, then the next step is to find out where we can get the cheapest money at probably the longest term."

With interest rates so low, Jones said, many individuals and families are opting to borrow against their houses to cover other debts and costs. Businesses also are taking advantage of the cheap cost to borrow money.

But he warned that the borrowing costs still tie up money for years to come.

"You are robbing your future growth until that debt gets taken care of," Jones said.

With firms and families, Jones said he implores his clients to take this final and crucial step: "Stop the habits that got you in the mess."

Because the state budget crisis stems in large part from the mass infusion of money into the state treasury during the high-tech boom and the ensuing bust, many say the state needs to make permanent changes to balance revenues with spending.

"The $30 billion (deficit) is really three years of not dealing with the fundamental problems," said John Ellwood, a public policy professor at the University of California, Berkeley.

McClintock has suggested that the plan violates the state constitution's ban on borrowing more than $300,000 without voter approval. But in a series of cases dating to 1856, courts have ruled that rolling over some year-to-year debt is legal as long as the state has a reasonable expectation that it will have the revenue to retire the debt within a certain time.

In January, Davis released a budget that did not contain a massive borrowing plan, but rather included higher taxes and deeper cuts. But GOP lawmakers disliked the tax hikes, Democrats bridled at slicing into health programs for the poor and the governor included the deficit bonds in his May budget revision.

Now, Davis and lawmakers are defending the borrowing plan, saying the imbalance between the state's revenues and expenses will be dealt with once the pressure of passing a budget is relieved. And they say the innovative borrowing plan would save critical state services.

"It is paying off that deficit that allowed me to present a school budget that prevents 30,000 teachers from being laid off, that keeps class size reduction funding in place and keeps funding in place for accountability programs for education," Davis said during a recent press briefing.

The state's nonpartisan Legislative Analyst's Office estimates that the state would pay about $2.4 billion yearly in payments and interest for the deficit bonds, and the interest would cost California taxpayers a total of $1.5 billion over five years.

Meanwhile, the central debate surrounding the deficit bonds persists: whether to raise state sales tax by a half-penny or cut programs to pay off the bonds.

Democrats have called for the half-cent sales tax, and financial lenders have implored state officials to dedicate a stream of revenue -- preferably a new tax -- to paying off the bonds.

"We view a shorter deficit-funding bond supported by its own tax as a better option from the point of view of the state's creditors than a longer deficit-funding bond with no new taxes," said Renee Boicourt, managing director of Moody's Investors Services.

But Republicans -- the first to formally introduce the notion of securing long-term loans to finance part of the deficit -- insist the state can cut back in other areas to pay back the bonds.

Credit rating agencies already have downgraded California's credit -- ranking at the bottom with only New York and Louisiana -- and are warning of more downgrades close to junk-bond status if a budget agreement is not reached quickly. The ratings agencies have said they are worried about the state's ability to pay back its existing loans and that California's cash will run dry by the end of August if no budget is in place.

"In order to borrow from the public market, the state needs to show that it has a plan to pay back the money, and therefore a budget has to be enacted," Boicourt said.

An even lower credit rating would mean higher costs to borrow money.

Other states, such as New York, have sold deficit bonds, Boicourt said.

"New York state sold deficit bonds repeatedly, decade after decade. At the moment, they have on their books deficit bonds from the '70s, the '80s, the '90s, and they just sold some last month," Boicourt said. "So part of their financial burden is every year they have to come up with a certain amount of revenue to pay for all those bonds."