Controller John Chiang sounds the alarm bells

by Brian Leubitz

While tax season is gearing up, the state government is now running low on cash reserves. Controller John Chiang announced today that without payment delays and other tactics, the state will run out of cash in March:

California will run out of cash by early March if the state does not take swift action to find $3.3 billion through payment delays and borrowing, according to a letter state Controller John Chiang sent to state lawmakers today.

The announcement is surprising since lawmakers previously believed the state had enough cash to last through the fiscal year that ends in June.

But Chiang said additional cash management solutions are needed because state tax revenues are $2.6 billion less than what Gov. Jerry Brown and state lawmakers assumed in their optimistic budget last year. Meanwhile, Chiang said, the state is spending $2.6 billion more than state leaders planned on. (SacBee)

To some extent this happens every year. Last year we had to borrow $10B to tide us over until tax revenues came in.  And heck, Chiang thinks this year will only be $5.4billion. The world is getting better, hooray.

Unfortunately, with the continuing high demands on state services, this is really to be expected. And, Chiang, as he has always done, will have to find a way to balance the state’s checkbook.  Fun job, isn’t it?

One of the bigger news stories circulating this morning is Arnold’s letter to Treasury Secretary Paulson warning that California might run out of cash if the credit markets don’t unfreeze. The state needs to borrow $7 billion but is having trouble finding a willing lender. The gist of the problem, according to the LA Times:

It’s customary for California to borrow billions of dollars at the start of the fiscal year to fill its coffers until the usual flood of sales tax receipts comes in after Christmas and income tax receipts arrive in the spring.

“California is so large that our short cash-flow needs exceed the entire budget of some states,” Schwarzenegger wrote.

The cash needs to be in the state’s bank account by Oct. 28 to be available to fund a scheduled $3-billion payment to more than 1,000 school districts.

Said Matt David, Schwarzenegger’s communications director: “California faces the potential of a perfect storm created by the financial crisis’ effect on liquidity, lower-than-anticipated revenues currently coming into the state, and our late budget. The governor is taking steps to prepare for this scenario to ensure that the state can make critical payments.”

The SacBee clarifies the role the late budget played in bringing about this mess, by quoting California Treasurer Bill Lockyer:

“More urgently, because the state budget was so late, we have only four short weeks to complete what otherwise would be a routine revenue anticipation note sale to meet the state’s cash-flow needs,” he said.

Had the budget been on time the revenue anticipation note sale would have been completed earlier, before the credit markets seized up. We have Sacramento Republicans to thank for this, who put their own ideological agenda above basic financial principles and the needs of the state.

It’s also likely that this letter is not just designed to publicize California’s cash flow problem, but to help grease the skids for the Paulson bailout that is being debated right now on the floor of the House. Arnold supports the bailout but believes it was “mismarketed”:

What was wrong right from the beginning was the way it was marketed. I mean, you can’t talk about a Wall Street bailout. No one in America is interested in bailing out Wall Street [laughter] because those are the guys that are making the billions of dollars. So who is going to help that? But if you go and explain to people this is going to be a bailout for the ordinary citizens and for businesses, small and large, for everyone, the economy and everyone will be affected all the way down to Main Street, not Wall Street, that is then a different ball game.

This letter is certainly much better marketing for the bailout than anything we’ve seen out of Capitol Hill. That’s not to say the cash crunch isn’t real here in California – it is. And we should remember who and what we have to thank for it – Republicans, and the 2/3 rule.