Borrowing of $12.5 Billion by State Urged

State Controller Kathleen Connell, warning that the “financial integrity” of California is at stake, is calling for state government to borrow an unprecedented $12.5 billion to overcome a cash flow crisis.

She said that the squeeze between income and expenditures may persist through the rest of the fiscal year, but that the general fund cash box must receive an immediate infusion to pay all the state’s bills for October.

Connell asked state Treasurer Phil Angelides to issue short-term “revenue anticipation notes,” a routine form of borrowing that is repaid when the flow of tax revenue improves. A spokeswoman said Angelides intends to issue the notes as needed.

Connell, a Democrat, blamed the cash shortage on a variety of things, including the long-delayed sale of a record $11.9 billion in energy bonds authorized by the Legislature and Gov. Gray Davis during the electricity crisis last year.

Angelides announced Thursday that he will confer with investors today and disclose the timetable for the long-awaited bond sale.

Davis’ office refused Thursday to comment on Connell’s demand or her sometimes biting analysis of why the borrowing is necessary. Instead, aides directed reporters to the state Department of Finance.

“It’s in the best interests of the state to have cash on hand to pay for services. This is what this is about,” said Anita Gore, the department’s spokeswoman. She noted that last year such borrowing totaled $5.7 billion.

Approximately $7 billion from the sale of the energy bonds must be spent to repay the state’s general fund, which made loans to the state Department of Water Resources for electricity purchases last year when California’s three biggest private utilities were near financial collapse and unable to buy their own supplies.

Originally, the bonds were to be sold in June 2001, but a series of disputes involving the department and the state Public Utilities Commission--as well as litigation and technical issues--delayed the transaction, which would be the biggest in California history.

Connell, prevented by term limits from seeking reelection this year, also blamed the cash squeeze on reduced tax collections because of the state’s economic “uncertainty” and the recent shortfall in anticipated revenue.

She said all her findings “argue for a revenue anticipation note of $12.5 billion to ensure the financial integrity of the state.”

Sen. Tom McClintock of Thousand Oaks, the Republican nominee for state controller, called Connell’s request for the revenue anticipation notes “an inevitable result of the most reckless budget adopted in California’s history.”

“She has no choice but to maintain funds to pay bills,” said McClintock, who, like most other Republicans voted against the $99-billion state budget. “The fault is not the controller’s. The fault is of the governor and Legislature for adopting a budget that is wildly out of balance.”

“The controller is doing what she ought to be doing,” said Steven Westly, the former eBay Inc. executive who is the Democratic candidate hoping to succeed Connell. “She is being fiscally conservative and independent. We’ve got to take care of the debts that the Legislature has left us with.”

McClintock opposed the budget--and has voted against 11 of the 16 state budgets since he has been in the Legislature. Westly praised the end of the budget standoff earlier this month, but said more cuts are needed.

Connell, a regular critic of Democrat Davis, said the administration had projected revenues at $3 billion higher than her own calculations. She also asserted that the governor’s budget experts had “substantially inflated” revenue expectations during the first six months of 2003.

But Gore defended the Finance Department, at one point rejecting an assertion by Connell that an estimate of higher revenue “simply masks” other issues.

She said the department takes “very seriously” the tricky business of making economic predictions.

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Times staff writer Dan Morain contributed to this report.