Schwarzenegger mulls $20bn bond

California faces an $8bn deficit next year

Californian governor-elect Arnold Schwarzenegger is considering tackling the state's fiscal crisis with a record-breaking $20bn bond issue.

The proposal, which requires approval by electors, would increase California's debt by 50%.

But it would also solve the immediate headache of an $8bn 2004 deficit and $12bn of disputed debt financing.

And Mr Schwarzenegger's team is reportedly drawing up a linked austerity package.

Spending pledge

Among ideas under consideration is a spending cap that would require the state to use surplus revenues to help retire the deficit bond early.

Mr Schwarzenegger wants to balance the budget without tax increases

Plans are still at an early stage, but Mr Schwarzenegger's team is canvassing ideas from Wall Street and elsewhere.

According to fiscal experts, the idea is viable, but only if tied to a credible package of spending cuts.

Mr Schwarzenegger has pledged to end what he terms the "tax and spend" methods of Governor Gray Davis, during whose tenure the state's finances have seriously deteriorated.

The attraction of the bond plan for Mr Schwarzenegger is that it would allow him to balance the budget without either raising taxes or cutting spending.