California budget gap now seen nearing $42 billion

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SAN FRANCISCO (Reuters) - California faces a $41.8 billion shortfall for its combined current and next fiscal years, up from a prior $28 billion estimate as its economy weakens and revenues decline, the director of the state's Department of Finance, said on Thursday.

Michael Genest, also Gov. Arnold Schwarzenegger's state budget architect, told reporters at a briefing in the state capital of Sacramento the revised shortfall estimate includes provisions for a $2 billion reserve.

Schwarzenegger said on Wednesday that California's budget deficit for its current fiscal year had widened to $14.8 billion from a previous estimate of $11.2 billion, and the government of the most populous U.S. state and world's eighth biggest economy may be out of cash by the end of February.

"California faces a growing financial crisis," the Republican governor said, urging the state's Democrat-led legislature to close the current fiscal year's budget shortfall.

"If we don't put aside our ideological differences and negotiate and solve this problem we are heading toward a financial Armageddon," Schwarzenegger said.

He has urged lawmakers to balance the state's budget with deep spending cuts and new revenues, including revenues from increasing the state's sales tax.

Standard & Poor's Ratings Services late on Wednesday lowered its rating on California's recently issued $5 billion revenue anticipation notes and placed $46.6 billion of the state's general obligation debt on negative credit watch for a possible downgrade, reflecting concern over the biggest issuer of U.S. public debt's weakening finances.

California's general obligation debt rating is paired with Louisiana's at the bottom of Wall Street's state rankings. Standard & Poor's and Fitch Ratings currently have 'A+' ratings on the debt, while Moody's Investors Service has an 'A1' rating on the bonds.

(Additional reporting by Jenny O'Mara in Sacramento, California)

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