Chiang: State Broke on March 8

JAN. 31, 2012

By CHRISS STREET

State Controller John Chiang shocked California legislators today when he sent a letter announcing that the state will run out of cash on March 8. That is, unless Legislature allows state Treasurer Bill Lockyer to delay $2.4 billion in payments to universities, counties and Medi-Cal, while borrowing another $3.3 billion from Wall Street bankers.

The controller’s announcement comes just two weeks after California Gov. Jerry Brown gave his State of the State speech to the Legislature and then immediately hit the road in a two-day campaign swing through Southern California to tout his November ballot initiative to raise taxes on all Californians by $7 billion.  At a stop with 50 of Orange County’s top business leaders and CEOs, the governor outlined how he was already making severe budget cuts, reorganizing state government and implementing a 12-point pension reform plan.

Brown said he offered these actions as credibility for asking business to support his November tax initiative.  The governor added that he welcomed California’s population growth and assured his audience that the state’s future is bright.  Brown reiterated his support for the nation’s first high-speed rail system and for expeditious completion of the environmental review on a proposed project to fix the state’s water delivery system.

The lawmakers had been assured by the Brown administration’s Department of Finance that the state had sufficient cash reserves through June 30, the end of the 2011-12 fiscal year.

But Chaing emphasized that, for the first six months of the fiscal year, state tax revenues came in $2.6 billion below budget and spending came in $2.6 billion more than budget. Total shortfall: $5.2 billion.

The controller’s announcement came on the same day the Assembly Budget Committee approved and sent to the floor legislation already passed by the state Senate that would supposedly fund the state until the end of the year by empowering the Treasurer to borrow $865 million from other segregated California trust funds.

Out of Funds

Chaing warned that the state would be unable to make timely payments to vendors and other governmental agencies of at least $730 million beginning on March 8 and lasting through approximately April 13. Furthermore, Chaing warned that the state needed to have at least a $2.5 billion reserve to handle the timing of large payments through the end of June.

The Sacramento Bee quoted Democratic Assemblyman Bob Blumenfield of Woodland Hills that the $5.4 billion shortfall was small relative to the $10 billion that state leaders were prepared to borrow last year. But Republicans questioned the ability of the state to pay back the accounts.

The Bee reported that Michael Cohen, chief deputy director of Brown’s Department of Finance, said the state would pay back special funds whenever programs need the money to operate.  Cohen also said the state is spending more money than expected because courts have blocked some cuts, while some savings may come later in the fiscal year than forecasters predicted.

This new budget crisis comes at a very difficult time for the governor after he travelled the state selling his tax initiative as preventing draconian funding cuts to popular K-12 schools.  Although early polling of voters had indicated growing support for the initiative, Brown’s credibility may collapse as voters learn the November tax increase initiative appears only to fund this year’s budget shortfall and will still result in draconian cuts to schools.