Gov. Gray Davis has offered a "precariously balanced" revised spending plan that will strap lawmakers with formidable budget holes in future years, Legislative Analyst Elizabeth Hill said Monday.
The $100 billion plan, built around borrowing, fails to bring California's spending into line with its revenues, according to the initial review by the Legislature's nonpartisan budget adviser.

And while she said "a multiyear solution at this point was probably inevitable," she stressed that legislators must also make permanent changes to the state budget -- namely chopping government spending or raising taxes.

"All of the easy answers have been taken, and there are only tough choices ahead," Hill said.

Davis last week unveiled an overhauled plan that relies on more than $17 billion in short-term borrowing to help fill what he estimates to be a $38.2 billion budget shortfall. The largest piece of borrowing would come from selling $10.7 billion in deficit bonds, which would be paid off in about five years while the state assessed an additional half-penny sales tax.

Davis' revision also includes $18 billion in sweeping cuts, cigarette tax hikes, an income tax increase on wealthier earners, and the assumption that the vehicle license fee for drivers soon will be tripled.

When he announced his new plan, Davis said he only reluctantly included its large borrowing component after legislators endorsed rolling over part of the deficit, and he called on lawmakers to include more long-term solutions in a final agreement.

Davis on Monday issued a statement saying he "couldn't agree more" with Hill's analysis.

"It is imperative that the Legislature do three things: pass a budget on time, have a responsible mechanism to finance the current-year deficit with a new revenue source, and enact structural reform to avoid financial problems in the future," Davis said.

California's spending swelled along with revenues during the high-tech boom of the late 1990s and earlier this decade, but now economists believe soaring revenues from stock options and capital gains amounted to an economic anomaly.

Thus, Hill said, even if the slumping economy perks up, revenues will not be able to support the spending levels. The state will face a $7 billion deficit in 2004-05 and see operating deficits persist for at least three more years, she said.

"The economy cannot resolve the state's fiscal problems," Hill said. "We have to take ongoing actions."

It is a refrain that Hill has been repeating for months, urging lawmakers to make tough choices and ongoing spending reductions.

"The magnitude is really such that we need to get our fiscal house in order," Hill said.

Hill estimates that the state's budget deficit will reach about $29 billion by the end of next fiscal year. The figure is some $9 billion lower than that used by Davis and his financial advisers because Hill uses a slightly more optimistic revenue forecast and counts only spending required by state law in calculating how far short revenues will fall.

Davis, on the other hand, tacks on about $5 billion in spending obligations that are not required by law but that he has promised to fund during his tenure.

Hill's analysis came Monday as the state's top fiscal officers prepare to travel to Wall Street to negotiate the terms of an unprecedented short-term loan to pay for state operations.

State Controller Steve Westly repeated warnings to lawmakers Monday, urging them to reach a budget agreement before the July 1 start of the fiscal year.

Westly and others will travel to New York later this week to negotiate credit terms for $11 billion in short-term loans to help pay the state's bills. But, he said in a letter to legislative leaders, even that unprecedented stream of loans will dry up by September.

A budget must be in place by then, he said, as state officials go back to Wall Street for more short-term loans -- or revenue anticipation notes -- in the fall to "balance out the normal peaks and valleys in the state's revenue stream."

"Attempting to borrow additional funds in a no-budget situation would be unprecedented," Westly wrote. "In that scenario, it is possible that investors will refuse to lend the state money anymore."