By Jim Christie

SAN FRANCISCO (Reuters) - California's revenues since the start of its fiscal year are trailing estimates by more than $1 billion, according to the state's November revenue report, which comes as Governor Arnold Schwarzenegger wrestles with crafting a balanced state spending plan.

Next month Schwarzenegger must present to lawmakers a balanced budget plan for California's next fiscal year beginning in July, while closing the deficit that has reopened in the current fiscal year's spending plan.

The combined shortfall for the two years has been pegged at about $21 billion -- the result of a state economy battered by a steep decline in its housing market, weak consumer spending, widespread layoffs and 12.5 percent unemployment.

The broad economic weakness gripping the most populous U.S. state was reflected in the state Department of Finance's November revenue report released on Tuesday.

"Preliminary General Fund agency cash for November was $4.9 billion, or $439 million below the Amended 2009 Budget Act forecast, which includes the unallocated revenue adjustment. On the same adjusted basis, year-to-date revenues are $1.035 billion below the expected $30.414 billion," the report said.

November revenues from personal income taxes were $257 million, or 12.0 percent, below forecast, and sales and use tax receipts were $187 million, or 6.4 percent, below estimate.

"We're heading into yet another very difficult budget year," said H.D. Palmer, a spokesman for Schwarzenegger on budget matters.

In July the governor, a Republican, and the state's Democrat-controlled legislature backed a plan to close a budget gap of more than $24 billion largely with spending cuts, ending a fiscal crisis during which the state controller issued IOUs for many of the state's bills to preserve cash for priority payments, such as payments to investors holding California's bonds.

Some analysts believe California's budget politics could become so contentious and drawn out that the state may be forced to default on its debt obligations.

"In my opinion, California is now more likely to default than it is to not default. It is not a certainty, but it is a possibility that is increasingly likely," Bill Watkins, executive director of California Lutheran University's Center for Economic Research and Forecasting, said in a report released on Wednesday.

Palmer said talk of default is overly dramatic, adding that state officials have the means to avert one, including state law allowing them to make debt service payments even if a budget is not in place.

"It is both inaccurate and irresponsible to suggest that California is on the verge of default on our bond debt," Palmer said. "Going back as far as the Great Depression, California has never ever missed a scheduled payment to a bondholder or noteholder."

Tom Dresslar, spokesman for State Treasurer Bill Lockyer, said in a statement that Watkins had made "dangerous comments." "To be crystal clear: The state faces absolutely no danger of defaulting on its bond payments," Dresslar said.

Watkins said that if officials in the state capital of Sacramento cannot draft an "honest balanced budget" and put the state's finances on a sustainable path, they must prepare a worst-case scenario plan for a default, which could be triggered if banks refuse to honor any IOUs the state should issue again.

"They need to work with federal government and Federal Reserve Bank officials to insure a coordinated plan to limit damage to financial markets," Watkins said. "That plan needs to be ready to release when markets go crazy, because the markets will go crazy when participants realize that default is possible. It could be needed sooner than they think."

(Editing by Leslie Adler)