Controller Warns of State’s Cash Flow Emergency

While there are 61 days between today and July 29, the time available to align the State’s spending with its revenues is far less. There are three reasons:

(a) Cash solutions need time in order to be realized. For example, reductions in payments that occur later in the fiscal year cannot help the cash shortage we face in the beginning of the fiscal year.

(b) As a precautionary measure, I am preparing to sell Revenue Anticipation Warrants (RAWs) to address part of the cash shortage. While I would prefer to avoid them altogether, prudence demands contingency planning. To complete the borrowing needed by July 29, my office will have to meet with credit rating agencies and launch a major investor outreach effort in mid-June. Without credible budget and cash flow solutions in place, the rating agencies and potential investors who will be evaluating the credit risk of these securities will be highly skeptical about investing in California. It is also worth mentioning that the passage of Senate Bill 116 is a necessary component to a successful sale. Legislative inaction to remedy the budgetary imbalance can compromise the success of this sale or further increase what is expected to be the largest financing costs in the State’s history.

(c) The State’s chronic inability to resolve its structural budget deficit, the fact that the State has not had a positive cash balance since July 12, 2007, and has had to borrow internally from special funds, and the collapse of the global credit markets all have significantly limited the State’s ability to borrow from Wall Street. Simply-stated, the State will not be able to borrow its way out of this crisis. Tough decisions cannot be avoided.

Because of these reasons, I strongly urge you to take action no later than June 15th.

Failure to immediately address the budget deficit and cash shortage will severely damage our already fragile fiscal position. A protracted stalemate would do immeasurable harm to our economy by potentially extending a recession that many economists predict will bottom out by early 2010. Inaction would create an even greater fiscal hardship for Californians, especially those businesses that provide goods to the State and those vulnerable individuals who depend on public health and social services. The ability of the State to discharge its most fundamental duties of protecting its citizens, educating its youth, and safeguarding its natural resources will be compromised.