California in the Red

Last week the fiscal crisis in California became tangible. State Controller Kathleen Connell recognized that the slumping economy, an unresolved energy crisis, and tax returns that failed to reach Governor Davis’ wishful expectations have contributed to the state treasury shortfall. On Wednesday, April 25, Connell revealed that California must borrow between $7.5 billion and $11 billion to pay for state expenses through July. This is the largest loan of its kind in United States history!

The $7.5 billion loan, proposed by the Controller will cover a shortfall of $4.6 billion due to weak tax receipts and higher-than-expected bills, and “repayment” of the $5.7 billion the state remunerated for electrical power last August. Connell is calling for the issue of revenue anticipation warrants, which are repaid the following fiscal year, most likely in the second half of 2002-03. California has issued such warrants five times since 1939; the last, in the recession of 1994, was for $7.2 billion.

The loan will only compensate for California’s bills through July. Money to cover the rest of the summer would come from the “anticipated” sale of $6.4 billion in bonds for electricity purchases made on behalf of utility companies last year. Keep your fingers crossed, because it seems that Wall Street has little faith in the Governor’s fiscal track record. Since last summer, California has been unsuccessful in securing the sale of these bonds and no one is sure of future prospects.

This short-term solution allows the state to continue doing business. The greater challenge is the $20 billion-plus shortfall. The decline in tax receipts is significant – the governor’s preliminary budget in January estimated collecting $8.3 billion; the reality is that less than $4.5 billion was received in state income tax. Analysts now estimate California will collect revenue equal to three years ago; however, in that time government has grown 36%.

Before all Californians were impacted by the energy crisis, Governor Davis was given ample warning to react. Republicans and energy experts met with the governor to discuss the oncoming crisis and he took no action. Even stronger warnings were given to the governor regarding the budget deficit. In spite of such warnings on Thursday the governor’s lieutenants in the State Legislature closed the legislative special session that was convened solely to deal with the state’s fiscal woes.

California’s economic woes can be overcome with strong leadership. Over the past three years, budget spending has skyrocketed by 37%. The budget must be cut by at least $15 billion to reflect a modest and reasonable growth over the last 4 years. The state reserves must be increased until the economy is in a solid recovery. Government waste must be reduced by adopting a zero based budget practice for all state departments. These tough decisions must be made immediately if California is to get back in the black.

This monetary crisis worsens by the day. Since January, budget-conscious Assembly Republicans have been asking the governor and leaders of the majority party to take definitive action to close this deficit. We share the people’s frustration of watching this budget gap widen when prudent minds say spending reductions are needed now.

Did I read correctly that the long-awaited incredible shrinking bond issue is now down to $6.4 billion??? What happened to the other $6 billion that they were needing?

Oh, well lookie here. It seems that California is just going to "charge" the other $6 billion. Wanna' bet that $6.4 billion is all Wall Street would go for? From Kathleen Connell's Website:

STATE CONTROLLER KATHLEEN CONNELL CALLS FOR THE ISSUANCE OF A REGISTERED REIMBURSEMENT WARRANT

Controller Connell Projects That a RAW may be Necessary to Deal With State's Cash Flow Problem in the Next Fiscal Year (2002-2003)

SACRAMENTO, April 24, 2002 - State Controller Kathleen Connell today announced that she has sent a letter to the Governor requesting authorization to establish a General Cash Revolving Fund. Establishing the General Cash Revolving Fund is the first required step to issuing the Reimbursement Warrant (RAW).
"I am taking this step as a precautionary measure and in consideration of the impact the recent recession has had on the State's finances," stated Controller Connell. "I think it is fiscally prudent to set up the revolving fund, sell the RAW and give the General Fund an infusion of much needed cash. This will ensure that we can meet expected expenditures at the end of this fiscal year and at the beginning of the next fiscal year."
The RAW is a unique short-term instrument which allows the State to borrow in one fiscal year and repay in a subsequent year when surplus cash becomes available. The RAW was last issued by the State in 1994. Controller Connell estimates that this RAW will be between $10 and $11 billion, and may be repaid during the latter half of fiscal year 2002-03.
"Unfortunately, revenues are down significantly from the prior fiscal year and we are left with no alternative but to prepare for the sale of this RAW," explained Connell. "Our current projection of Cash Flows shows that the State will be faced with a $843 million deficit in June 2002, and a $4.6 billion cash deficit at the end of July 2002 of the next fiscal year."

This post is dedicated to the two or maybe three Californians who have actually bothered to read their Constitution.

The state of California cannot issue debt in excess of $300,000 without voter approval. Courts have allowed issuance of short-term Revenue Anticipation Notes (RANs), a common form of short-term borrowing used to even out cash flow arising from the differential timing between receipt of revenues and payment of expenses. RANs must be repaid within the fiscal year of issuance, preventing their use as a form of deficit finance. The state may also issue Revenue Anticipation Warrants (RAWs) for short-term borrowing across fiscal years. In 1994 California policymakers pushed the envelope with respect to the usage of RANs and RAWs to finance ongoing deficits. The state's $7 billion loan package was the largest municipal debt issuance in history and came on the tail of four consecutive budgets balanced by a combination of deep spending cuts in higher education and programs for the poor, internal borrowing, and, in 1991, a significant tax increase.

CALIFORNIA CONSTITUTION, ARTICLE 16 PUBLIC FINANCE

SECTION 1. The Legislature shall not, in any manner create any debt or debts, liability or liabilities, which shall, singly or in the aggregate with any previous debts or liabilities, exceed the sum of three hundred thousand dollars ($300,000), except in case of war to repel invasion or suppress insurrection, unless the same shall be authorized by law for some single object or work to be distinctly specified therein which law shall provide ways and means, exclusive of loans, for the payment of the interest of such debt or liability as it falls due, and also to pay and discharge the principal of such debt or liability within 50 years of the time of the contracting thereof, and shall be irrepealable until the principal and interest thereon shall be paid and discharged, and such law may make provision for a sinking fund to pay the principal of such debt or liability to commence at a time after the incurring of such debt or liability of not more than a period of one-fourth of the time of maturity of such debt or liability; but no such law shall take effect unless it has been passed by a two-thirds vote of all the members elected to each house of the Legislature and until, at a general election or at a direct primary, it shall have been submitted to the people and shall have received a majority of all the votes cast for and against it at such election; and all moneys raised by authority of such law shall be applied only to the specific object therein stated or to the payment of the debt thereby created. Full publicity as to matters to be voted upon by the people is afforded by the setting out of the complete text of the proposed laws, together with the arguments for and against them, in the ballot pamphlet mailed to each elector preceding the election at which they are submitted, and the only requirement for publication of such law shall be that it be set out at length in ballot pamphlets which the Secretary of State shall cause to be printed. The Legislature may, at any time after the approval of such law by the people, reduce the amount of the indebtedness authorized by the law to an amount not less than the amount contracted at the time of the reduction, or it may repeal the law if no debt shall have been contracted in pursuance thereof. Notwithstanding any other provision of this Constitution, Members of the Legislature who are required to meet with the State Allocation Board shall have equal rights and duties with the nonlegislative members to vote and act upon matters pending or coming before such board for the allocation and apportionment of funds to school districts for school construction purposes or purposes related thereto. Notwithstanding any other provision of this constitution, or of any bond act to the contrary, if any general obligation bonds of the State heretofore or hereafter authorized by vote of the people have been offered for sale and not sold, the Legislature may raise the maximum rate of interest payable on all general obligation bonds authorized but not sold, whether or not such bonds have been offered for sale, by a statute passed by a two-thirds vote of all members elected to each house thereof. The provisions of Senate Bill No. 763 of the 1969 Regular Session, which authorize an increase of the state general obligation bond maximum interest rate from 5 percent to an amount not in excess of 7 percent and eliminate the maximum rate of interest payable on notes given in anticipation of the sale of such bonds, are hereby ratified.

From Dan Walters, SacBee, Dec 17, 2001:

The last time RAWs were issued was eight years ago, when a similar squeeze led to $4 billion in RAWs that were repaid over two years.
The controller then was Davis and, with his eyes already fixed on running for lieutenant governor and then governor, Davis made the most of his rare opportunity to participate directly in budget politics. He castigated then-Gov. Pete Wilson, who was seeking re-election at the time, for relying on phantom revenues and insisted on special spending-reduction "triggers" to assure repayment of the RAWs.
"We've had to jump through hoops to make the governor's budget work," Davis said as he sold the RAWs in July 1994. "He seems to think he can balance a budget on wishful thinking rather than reality."
If Davis doesn't accede to Lynch on the bonds, he may have to deal with Connell on the RAWs, giving her an opening to critique the fiscal performance of a governor with whom she has feuded for seven years. And if Davis tries to use some questionable, Wilson-like budgetary tricks -- such as counting on the federal government to cover more than a billion dollars in post-Sept. 11 security costs -- Connell will have an opportunity to do to him what he did to Wilson, making him jump through the hoops for the election-year RAWs.
The irony could not be sharper.

"Simon can't campaign on that reality, because nobody wants to elect someone who claims the party is over, but it's a fact. The only question is whether it happens this summer or next year."

If elected, Simon's best strategy would appear to be:

1. Take the budgetary poison immediately, blaming it on the prior administration. Recall Clinton's reneging on the middle class tax cut -- "Ah worked hahder on this than ahnythang in mah whole lyin' lahftahm."

2. Start campaigning in Washington for a capital gains tax cut, creating the one-year windfall he needs to get out of budgetary jail quickly (Cali has a capital gains tax all its own).

If Davis were re-elected, he'd blame the whole nasty mess on the previous administration, too. But he'd never understand that his (and California's) way out of the deficit swamp is cutting taxes...

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