California Controller John Chiang and Legislative Analyst Mac Taylor agree that California will face a major cash crisis beginning in late June and urge the Legislature to act quickly to close the $6.6 billion budget deficit projected for the current year and the $12.3 billion deficit projected for the 2010-11 budget year.
Last month the Governor convened a special emergency session of the Legislature to address the state’s budget situation but the relative mildness of the state’s cash crunch situation this spring, as opposed to last year at this time, suggests that the real budget battle will begin later in the spring.
Under Proposition 58, the Governor has the power to declare a fiscal emergency and call a special session of the Legislature to address the situation, which he did with the release of his budget last month.
According to an analysis by the Assembly Budget Committee, “Under this Special Session the Governor may submit legislation to address the fiscal emergency and has done so with his proposed amendments to the 2009-10 Budget and his proposed 2010-11 Budget. The Legislature is required to take action to address the problem within 45 days of the special session being called (by Monday February 22nd).”
The Legislature is currently in the process of holding budget hearings on the various aspects of the Governor’s January budget proposal. A chart developed by the Controller’s office shows that the Governor’s January budget proposal is far from balanced and projects the emergence of a $7 billion plus budget deficit by December 2010 if the Governor’s 2010-11 budget proposal is fully enacted.
Controller Chiang and Legislative Analyst Taylor Advise Legislature to Act Soon To Avert July Cash Crisis
California Controller John Chiang and Legislative Analyst Mac Taylor testified before the Assembly Budget Committee on February 3rd to discuss Prop. 58 requirements and the state’s cash flow crisis. To view a video of the hearing click here.
“What do you need to do now? You have an obligation to pass some bill,” Taylor said, noting that Prop. 58 does not specify a specific criteria for what action the Legislature has to take (i.e. close the full budget deficit).
Taylor said the special session can still go on after February 22, but the Legislature cannot take action on other legislative items until they pass something. He said the only real deadline they have in late February is if they want to pass a proposal in time to place it on the June ballot.
Taylor recommended that the Legislature enact a deficit reduction plan by sometime in March because budget solutions will take three months to implement to obtain the full amount of revenue savings in the 2010-11 budget year which begins in July.
Absent corrective action, Chiang said the state will run below its responsible $2.5 billion cash cushion sometime in late February and will run out of cash by the end of March or early April. According to documents provided by Chiang, the state’s cash reserves are estimated to decline from $3 billion at the beginning of this month to $1.2 billion at the beginning of March, dropping to a low point of minus $200 million by early April. (Click here to view a chart prepared by the Controller’s Office)
Beginning in early April, the state will begin collecting an estimated $6.6 billion in tax receipts and will have an estimated $6.6 billion in cash reserves by the end of May. The state’s cash situation will deteriorate in June and the state will run out of cash by early July.
“I encourage you to act promptly and quickly,” Chiang said, noting that the state will encounter virtually the same circumstances as last year, when the state narrowly avoided a “fiscal meltdown.”
Chiang urged the Legislature to resolve as much of this year’s $6.6 billion budget problem as possible, noting that the solutions need to be both “credible” and “sustainable.” He said the current year deficits have a compounding effect in the budget year.
“If solutions are slow to emerge and if they are neither credible nor sustainable, California will once again be unable to timely meet all of its payment obligations and my office will be forced to seek costly emergency financing, or conserve cash by delaying payments or issuing IOUs,” Chiang wrote in a letter to legislators.
Chiang said “students, the blind, the aged, the disabled, and taxpayers suffer” by the state failing to make the tough decisions necessary to bring its budget into balance.
Chiang said it will be very expensive for the state to borrow, through revenue anticipation notes (RANs), to cover these cash shortages because the state already has the “worst bond rating in the nation.” “Refrain from borrowing…it only exasperates our problem immediately and downstream,” Chiang said, noting that the credit agencies already have California on negative credit watch.
“We’re not sure if we can get a short term note,” Chiang said, noting that his cash flow projections already include borrowing from approximately 710 state funds.
Taylor agreed with Chiang’s assessment of the impending fiscal crisis in July but said he thought it was a relatively mild cash problem at the end of March, beginning of April, due to the short time window and small dollar amount of the problem. Taylor said he thought the Legislature or Controller would be able to cover this cash shortage without much difficulty by deferring some payments.
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