$6.7 BILLION DEFICIT LOOMS STATE BUDGET STILL FACES STRUCTURAL IMBALANCE.

Byline: Harrison Sheppard and Steve Geissinger Sacramento Bureau

Despite efforts by Gov. Arnold Schwarzenegger to ``pump up'' state finances, California's budget deficit may top $6.7 billion next year and could hit $10 billion the following year, a report issued Wednesday says.

Legislative Analyst Elizabeth Hill's projections had some Democratic legislators calling for new taxes even as Schwarzenegger maintained his opposition.

Hill said the state cannot rely on economic growth to close the budget gap in fiscal 2005-06 and should consider all options, including tax hikes.

``I think what this forecast tells me is we still have a lot of hard work to do, that we really haven't addressed the large structural imbalance facing the state of California,'' Hill said. ``While we've made some progress, there's a lot of heavy lifting yet to go.''

Schwarzenegger's options for fiscal 2005-06 are more limited than when he took office a year ago because of several fiscal and political maneuvers he made to balance the current year's budget.

Among those was Proposition 58, which state voters approved in March to prevent the state from borrowing in the future to cover the operating deficit.

The governor also struck deals with the education community and local governments which helped bail out the state for 2004-05, but limited its budget options in future years.

He also cut the vehicle license fee, lowering state revenue by about $4 billion a year, and has consistently stood against new taxes, except in cases of natural disaster or terrorist attack.

Some Democrats are expected to seek new taxes in the next state budget, rather than face steep cuts to state programs.

``We're not going to fight for taxes to spend for new programs, we're going to fight for taxes to help people survive,'' said Sen. Kevin Murray, D-Culver City, who was recently named majority caucus chairman.

``He came into office not just saying 'no taxes,' but he also said he'd blow up all the boxes (of the status quo), and one of the boxes should be the Republicans' no-tax pledge.''

Administration officials said Schwarzenegger continues to oppose new taxes and that he has always known it would take time to resolve the budget problems he inherited.

``The governor has said, on any number of occasions, it is going to take more than one year, particularly when it takes a number of years to create a crisis of this fiscal magnitude,'' said H.D. Palmer, spokesman for the Department of Finance.

Before Gov. Gray Davis was recalled last year, the deficit reached $38 billion for an 18-month period. When Schwarzenegger took office, he inherited a deficit of $17 billion for 2004-05.

He persuaded voters to pass Proposition 57, a $15 billion bond measure in March to help reduce some of the deficit, even as he struck deals with Indian casinos to generate more revenue.

Hill said there is still about $3.5 billion left over from Proposition 57. But she recommended it not be used until 2006-07, when the deficit could be even higher.

Harrison Sheppard, [phone]

harrison.sheppard(at)dailynews.com