SAN FRANCISCO - California is in "uncharted waters," Gov. Arnold Schwarzenegger's top finance official told The Bond Buyer's 18th Annual California Public Finance Conference yesterday, a day after the governor said he would veto the budget that passed the Legislature this week, more than 11 weeks into the fiscal year.

"To veto the entire budget is unprecedented," said finance director Michael Genest, addressing the conference through a phone hookup because he could not leave Sacramento during the budget turmoil. "We don't know what will happen here."

The budget that finally cleared both houses this week was balanced to a significant degree by bringing revenue from fiscal 2010 into fiscal 2009 through tools like accelerating income tax withholding schedules.

Genest described the Legislature's budget as "almost pure gimmickry."

Schwarzenegger said his promised veto comes largely because lawmakers failed to include a budget reform proposal that met his insistence on a rainy-day fund that can only be tapped when revenues were running low.

The lawmakers' rainy-day fund could be tapped with the same two-thirds vote that is needed to pass a budget in the first place.

"The rainy-day fund could have been raided at the will and the whim of the Legislature," Genest said. "That rainy-day fund would have been a very leaky bucket indeed."

Genest said he regretted that California was adding to the angst created by the financial turmoil of recent days, but backed up Treasurer Bill Lockyer's frequent assurance that the state's bonds are safe havens.

"We will make our payments on our bonds," Genest said. "There is no doubt about that."

The state is actually accumulating cash as the weeks drag on without a budget, because of all the bills it is not authorized to pay.

"The day we get a budget, those bills will be due and payable and then our cash situation is going to go to a very difficult situation indeed, but we think we have that situation managed," he said. "We think we can issue an interim [revenue anticipation note], and a Ran in a timely enough fashion that we won't have any problem running out of cash even when a budget is in effect. Whether that's today or tomorrow, next week or next month, or even in two months, we can handle it."

The ongoing debate over the rainy-day fund is pretty academic, deputy treasurer Paul Rosenstiel said during a later panel yesterday.

The state has a rainy-day fund established by the voter-approved Proposition 58 in 2004.

"It has zero in it," Rosenstiel said. "The point is, rainy-day funds don't help you unless you solve the structural deficit first."

Emily Raimes, the Moody's Investors Service lead analyst for California, said that even when a budget for the current year takes effect, questions will remain, particularly given the overall state of the economy.

"There's a possibility you will see downward revenue revisions this year, and then there's the question of what the state will do to meet those, and how that will position them for the next year's budget," she said.

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