Sacramento -- California, struggling with a gaping budget deficit and dubious fiscal credibility, put the finishing touches on a short-term borrowing package Wednesday that could cost taxpayers as much as $275 million in interest and fees.

The state's finances are so dire that $84 million of that cost will go to seven Wall Street banks for agreeing to pay investors if California can't repay the debt that comes due in a year. That amount is about what the state plans to spend next year on a highly touted program to provide medical insurance to children of the working poor.

The $11 billion deal is just the first of four debt issues totaling $27 billion the state expects to issue in the coming months that will generate a bonanza of as much as $960 million in fees and interest to Wall Street banks and debt investors. That is more than what the state will spend next year on child development, summer school, after-school and child nutrition programs combined.

To make matters worse, officials in Gov. Gray Davis' administration say that the Legislature's failure to make deep spending cuts back in January is creating even more pain now. The money for borrowing costs will come from the state's general fund, meaning there will be less money for the very programs Democratic lawmakers wanted to save.

"If you made those cuts and raised those revenues at the Legislature, you would not have those costs of borrowing," said Steve Peace, the state's finance director, in a recent interview in his office. "That would be money we would not have to cut from programs or raise in taxes."

California's tattered finances have left it with the lowest credit rating of any state in the union, and it has suffered the most drastic drop in tax revenue of any year since World War II. The steep drop in revenue has left it with a shortfall of more than $30 billion for the fiscal year beginning July 1.

State leaders have decided to spread that shortfall out over a number of years by financing it with debt issues. But the cost of that debt appears to have so far failed to spark a sense of urgency. Although the governor has submitted an austere budget, the Democrat-led Assembly and Senate in the past week have come back with spending measures that exceed what was proposed.

California's current-year shortfall includes an obligation to pay off $12.5 billion in bonds by the end of the month, but the state does not have enough cash to completely repay the debt.

In an attempt to raise enough money to meet its obligations, state finance officials intend to issue $11 billion next week in what are called "revenue anticipation warrants," a kind of debt security.

In addition to the $84 million in fees for the credit guarantee, the state expects to pay at least $136 million in interest, and possibly as much as $190 million. And both administration officials and Republicans anticipate that at least some portion of it would have to be refinanced again next year.

The credit agreement is necessary because without it, the state might not be able to secure a top credit rating for the debt issue, which in turn would drive away many potential investors in the debt. With the credit agreement reached Tuesday night, both Standard & Poors and Moody's told officials on Wednesday they would assign their highest short-term ratings to the securities.

The ratings are expected to be released this morning.

"Even given the difficult situation California is in, we anticipate our credit enhancement will give us tier-one ratings, and there will be a strong market for it," said Mark Batty, a deputy in the office of State Controller Steve Westly. "There will be a tremendous amount of liquidity. California is not going out of business. These are quite stable securities in the grand scheme of things."

But to put the cost of borrowing into perspective, consider La Clinica de la Raza in Oakland, which provides medical services to about 21,000 low-income clients each year.

The amount the state is paying for a credit guarantee could allow La Clinica to triple its services. Then again, said Jane Garcia, the clinic's director, "If they didn't finance it, they'd be shutting me down."

On top of the credit guarantee, the state has agree to pay a hefty penalty - - up to $770 million -- if the banks actually have to step in and pay off investors.

The state may have to borrow an additional $3 billion to cover anticipated cash flow shortages later this year, and lawmakers in both parties favor issuing nearly $11 billion in "deficit bonds."

Administration officials say they cannot yet calculate what the cost of the deficit bonds will be, but Republicans estimate the bonds will be priced with an interest rate of about 5 percent, creating at least $500 million in interest in the next fiscal year.

"Obviously, we are incurring a lot of debt, and there are a lot of costs related to that debt," said Assemblyman John Campbell, R-Irvine, who serves as the Republican budget guru. "There will be hundreds of millions of interest costs, which have to be accounted for in the state budget."

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Bank fees Here is an estimate of how much each bank involved in providing a credit guarantee to the state of California on its upcoming debt issue is expected to make in fees. This does not include interest the state will pay on the debt.
Merrill Lynch: $27,750,000

Citigroup: $15,000,000

Bank of America: $11,250,000

Goldman Sachs: $7,500,000

Morgan Stanley: $7,500,000

Lehman Bros.: $7,500,000

Groupe Societe Generale: $7,500,000