LOS ANGELES (AP) - State officials have authorized the sale of $12.3 billion in deficit bonds, setting the stage for the largest municipal bond offering in U.S. history.

The bonds sale, authorized Tuesday, will allow California to refinance short-term debt that comes due in mid-June. That money was borrowed last fall to cover some of the state's deficit spending in recent years.

State Finance Director Donna Arduin expressed her gratitude to California voters for last month's passage of Proposition 57, which allows issuance of $15 billion in deficit bonds. The debt is to be repaid over a maximum of 18 years.

An estimated $7 billion in bonds carrying a fixed interest rate will be sold May 4. An additional $5.3 billion in bonds with a variable interest rate are scheduled to go on sale between May 24 and June 15.

"The effect of our actions today will be to refinance our short-term debt at the best rates we can get in the market," Arduin said. Arduin, other Schwarzenegger administration officials, and representatives of the state treasurer and controller hope that Wall Street will give a stronger rating to the deficit bonds than the one that Standard & Poor's rating agency assigned Tuesday to the state's general obligation debt.

The BBB rating is the lowest of any state in the nation. Generally, the lower the rating, the greater the risk to investors and the higher the cost of borrowing.

Officials believe the deficit bonds will receive a higher rating because the primary source for repayment of the debt will be a quarter-cent of every dollar assessed by the state sales tax.

The deficit bond sale will eclipse the $11.3 billion in electricity bonds sold to refinance power purchases made during California's energy crisis in 2000 and 2001. At the time, the power bonds were the largest municipal offering in U.S. history, according to Juan Fernandez, director of the public finance unit in the state treasurer's office.

Finance Department spokesman H.D. Palmer said the governor and Legislature face a major challenge in the months ahead to close a $14 billion budget hole.

In January, Schwarzenegger proposed reductions in state payments to Medi-Cal providers; sharply higher fees for students at community colleges, state colleges and universities; caps on enrollment in health programs; and cuts in other social services.

The governor also is counting on the state reaping a share of Indian gaming revenues and borrowing to make contributions to state pension funds.