The lenders and Wall Street analysts who will play a key role in helping fill California's giant deficit called the governor's newly revised budget plan credible, but warned it lacks insurance that the state won't burrow deeper into a budget hole in future years.
California officials will meet with bankers over the next several days to try to sell the $100 billion plan. But analysts say, at first blush, it appears to lack the necessary structural reforms to bring the state's income and spending into balance.

"If you go out and borrow $10 billion and you didn't fix the problem, all you did was dig your hole even deeper," said Claire Cohen, vice chairwoman of Fitch Investors Services. "You only get the $10 billion once."

Gov. Gray Davis and his financial advisers have stressed the importance of pleasing Wall Street as lawmakers negotiate a final state budget designed to fill a deficit estimated to reach $38.2 billion.

Steve Peace, Davis' finance director, said lawmakers must approve a budget on time this year -- by the July 1 beginning of the fiscal year -- to convince bankers that the state has a grip on its financial problems.

He also has said that the governor's entire budget relies on Wall Street's approval of a plan to pay off deficit bonds with a sales tax increase -- a strategy that Republican lawmakers would have to accept despite vows against supporting tax hikes.

Also, Controller Steve Westly has said an on-time budget is vital for California to engage in billions of dollars in short-term borrowing to keep the state operating.

The revamped budget plan that Davis unveiled Wednesday consists of $18.8 billion in spending cuts, a menu of tax increases and significant borrowing to fill a budget shortfall expected to reach $38.2 billion by next fiscal year.

He is calling for a boost in the state's cigarette tax -- 63 cents a pack phased in over two years -- and for individuals making more than $150,000 annually and married couples making more than $300,000 to pay a higher percentage of state income taxes than they now do. The Democratic governor's plans also call for drivers to pay an average of $124 more a year for car license fees.

A key part of the budget is a plan to spread $10.7 billion of the deficit out over about a half-decade by selling deficit bonds -- which would be repaid by revenue from a new half-penny sales tax increase.

Analysts offered generally positive reviews of the borrowing plan -- saying that it has worked for other large governments in fiscal trouble, including New York City in the 1970s.

"It's kind of understandable at this point that they have to take extraordinary steps," said John Hallacy, managing director of municipal bond research at Merrill Lynch.

In an initial analysis of the Davis budget, Hallacy called it a "well-thought-out plan" with reasonable assumptions.

But he and other analysts warned that the new budget proposal still leaves the state strapped with billions in debt and hundreds of millions in interest payments and with a fragile outlook for the long term.

"It's not the panacea, it doesn't absolve everybody of taking other difficult steps," Hallacy said. "What it does is it provides some breathing room."

At the heart of the issue is overhauling the way that California fills its state treasury. The state is highly dependent on personal income taxes, and its fiscal fortunes are tied directly to the volatile stock market.

During the high-tech boom in the midst of Davis' first term, lawmakers and the governor poured money into social service and health care programs, education and tax breaks. But the ensuing market bust left the state billions short, and revenues have yet to recover.

"A compromise where you have high services and low taxes is not sustainable," said David Hitchcock, a director in the state and local government group of Standard & Poor's. "The state has to make a choice here."

Davis in January vowed that he would not sign a budget that did not include significant reforms to the state's volatile revenue-collecting structure. His revised budget lacks any major structural changes, though he urged lawmakers to quickly take up the task.

"If it doesn't get done this summer, then the state will be facing problems down the road," Davis said Wednesday.

Indeed, even with a menu of solutions included in Davis' plan to wipe out the deficit by the end of the next fiscal year, the state will face a nearly $8 billion deficit in 2005 unless the Legislature enacts changes in the way the state collects its revenues or makes permanent cuts to spending obligations.

"If the answer is 'We are going to wait for things to get better,' " Cohen, of Fitch Investors Services, said, "that's the wrong answer."

Despite warnings, however, banks and investment firms have an interest in helping California.

As Hallacy put it, "There is no real recovery in the nation without recovery in the state of California."