Broke State Budget Hits Dead End

FEB. 29, 2012

By KATY GRIMES

In in an effort to avoid a cash-flow problem, State Treasurer Bill Lockyer appeared on Bloomberg news last week talking about the sale of $1 billion in state revenue anticipation notes to Barclay’s and JP Morgan.

“The private placement deal is part of a $3.3 billion plan devised by Controller John Chiang, the state’s Department of Finance, and Lockyer’s office to address a seven-week cash shortfall that the state anticipated, starting around the end of this month,” the Wall Street Journal reported.

Chiang has been warning that the state would soon be facing a cash flow problem, largely because expected “revenues” did not come in.

The state will be doing more internal borrowing and delaying other payments, and plans to issue about $2 billion in general obligation debt.

According to Investorpedia, revenue anticipation notes are, “A short-term debt security issued on the premise that future revenues will be sufficient to meet repayment obligations.”

Robbing From Peter To Pay Paul

California taxpayers will be paying 0.20 percent interest on the notes, which according to Lockyer is a good deal.

But during the Bloomberg interview, Lockyer said that California has a revenue problem, not a spending problem. He added that former GOP governors spent more per every $100 of personal income  than Democratic Gov. Jerry Brown is spending, which Lockyer said is $5.14 out of every $100.

According to state finance experts, the interest rate is a good deal.

But the fact that California had $5 billion in phantom income in the 2011-12 budget was not good. Many are critical that top officials and politicians can’t or won’t give accurate revenue projections. How do you think that sits with the  the bondholders, who, in essence, are the state’s bankers?

According to a Capitol staffer who asked to remain anonymous, it means the majority-vote budget, crafted without bi-partisan support or Republican input, is bogus, and cannot be relied upon. “It is nothing more than a pie-in-the-eye spending plan, resulting with California deeper in debt,” the staffer explained.

The majority-vote budget is based largely on the hope of $4 billion more in projected tax revenues.

However, evidence of this problem is the state’s cash-flow shortage in a year when we actually took in $8 billion more than was originally projected in January 2011.

For a deeper explanation, I asked a state finance expert, who also asked for anonymity. The details are very interesting.

Shifting, Realigning, Renaming

As general fund resources dwindled during the recession, the state relied more and more on other funding sources to maintain programmatic spending.  On the books, it looks like general fund spending declined, when in reality, general fund programs were simply funded by fee-supported special funds, and federal funds.

Many think that Gov. Jerry Brown’s realignment proposal was reform, but the finance expert said instead it is an example “of the state simply redefining $5.6 billion in former general fund spending as no longer being ‘general fund.’ No programs have been reduced or eliminated through this process.  It simply reduces spending on the state’s main ledger, the general fund ledger.”

Because of the budget manipulations, general fund spending has declined from a high of $103 billion in 2007-08, to $92.1 billion in 2011-12.  “However, total spending grew from $194.3 billion in 2007-08 to $213.9 billion. That’s $19.6 billion more during the same time frame,” the finance expert explained.

So, while Lockyer is correct that general fund spending is down to $5.14 per $100 of income, total state spending per $100 of personal income has dramatically increased from 2008-09, when it was  $7.60 per $100 of personal income, to $8.04 per $100 of income in 2011-12.

And if federal funds are included, which has been heavily used to temporarily offset General Fund spending, especially within health programs, the situation is even more dire.

Increasing Spending, Decreasing Revenue

State lawmakers and financial officers knew what they were doing when they made these manipulations, couched in terms of “general fund decreases,” designed to cover up the increasing spending and decreasing revenue.

This is nothing more than if you borrowed a large amount of money from your rich uncle when you don’t have the income to support it, or any way to pay it back. And family members always know that a loan is really a gift.

It’s a thinly disguised plan where state officials are hoping that revenues will improve before the state finances totally melt down into bankruptcy. We’ve kicked the can so far down the road, that we are about to hit a dead-end alley.