LAO 2009 10 Budget Analysis Series California s Cash Flow Crisis

"Double Whammy" of Weak Revenues and Limited Credit Market Access Has Hurt the State's Cash Position

In a typical year, after the Legislature and the Governor agree to a balanced annual budget, the state must borrow from available special funds balances and municipal bond investors to "smooth out" cash flow deficits, particularly during the early months of the fiscal year. In 2008â€“09, weakening revenues and limited access to the credit markets have reduced the state's resources to address monthly cash flow deficits. As a result, the state's "cash cushion"-its available liquidity to allow the General Fund to make all budgeted payments on time-is unacceptably low.

Absent Prompt Action by the Legislature, Delays in Some State Payments Are Likely

The State Controller is the official responsible for managing the state's cash flows. Absent prompt action by the Legislature to begin addressing the state's massive budget and cash flow crises, the state's cash cushion is likely to be depleted in the coming weeks, and the Controller will be forced to delay certain budgeted payments, including some vendor payments and tax refunds.

Key Considerations for the Legislature and the Public

When Will the State "Run Out of Cash?" Strictly speaking, the state can never run out of cash because tax and other payments flow into state coffers every day. Instead, what may happen in the next few weeks is that available cash may no longer be sufficient to make all state payments that have been appropriated by the Legislature on a timely basis. The state would most likely reach this point-absent any corrective action by the Legislature or the Controller-in late February or early March 2009.

Which Payments Will Be Delayed in the Next Few Weeks? In the weeks before the state's cash on hand reaches zero, the State Controller must start taking corrective action. Specifically, he must delay payments classified as lowerâ€“priority under the law. The Controller must do this to help ensure that the state can keep making payments deemed as higherâ€“priority under the law. The Controller has broad discretion to determine which payments are "priority payments." The state's priority payments appear to include many related to schools, debt service, state employee payroll and benefits, and Mediâ€“Cal. Other categories of payments, such as tax refunds, student aid grants, and payments to local governments and vendors, may be delayed in the coming weeks.

When Will State Funding for Infrastructure Projects Resume? A board consisting of the State Treasurer, the Controller, and the Director of Finance recently decided to stop a key source of initial funding for many infrastructure projects funded by state bonds. The state's weak cash position and its current inability to access the bond markets for financing caused the board to take this step. Legislative action to address much or even most of the state's colossal $40 billion budget gap will be necessary for the state to improve its cash position and regain access to the bond markets. This would allow state officials to resume funding for the important public works projects.

Is Bankruptcy an Option for the State? When individuals, companies, and local governments are unable to pay their bills, filing for protection under the U.S. Bankruptcy Code is an option that allows them to renegotiate or restructure their financial obligations. States, however, are believed to be ineligible for bankruptcy protection.

Balancing the Budget Is the Best Way to Address the Cash Crisis

Balancing the budget-by increasing state revenues and decreasing expenditures-is the most important way that the Legislature can shorten the duration and severity of the state's cash flow crisis. Absent prompt action to begin addressing the state's colossal budget gap and other measures discussed in this report specifically to help the state's cash flows, state operations and payments will have to be delayed more and more over time. In the event that the Legislature and the Governor are unable to reach agreement to balance the budget by the summer of 2009, major categories of services and payments funded by the state may grind to a halt. This could seriously erode the confidence of the public-and investors-in our state government. To avoid this, it is urgent that the Legislature and the Governor act immediately to address the budgetary and cash crises that have put the state on the edge of fiscal disaster.

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LAO 2009 10 Budget Analysis Series California s Cash Flow Crisis