State Budget:
Legislative Analyst Says State Faces Huge Cash-Flow Problem

Legislative Analyst Mac Taylor reported May 7 that the state's budget problems are such that "without additional legislative measures to address the state's fiscal difficulties or unprecedented amounts of borrowing from the short-term credit markets, the state will not be able to pay many of its bills on time for much of its 2009-10 fiscal year."

"Deterioration of the state's economic and revenue picture (such as the $8 billion revenue shortfall we forecasted in March) or failure of measures in the May 19 special election would increase the state's cash flow pressures substantially – potentially increasing the short-term borrowing requirement to well over $20 billion," the analyst said (see table below, reprinted from the analyst's report).

The report stated: "While the February budget package eased the state's cash flow crunch considerably, the budget and cash pressures of recent months have taken their toll. The General Fund's 'cash cushion' – the monies available to pay state bills at any given time – currently is projected to end 2008-09 at a much lower level than normal. California is likely to have difficulty borrowing anywhere close to the needed amounts from the short–term bond markets based on the state government's own credit."

In other budget-related stories:

Income Tax Revenue $700 Million Below Estimates. State personal income tax revenue from July through April of this fiscal year came in $700 million below estimates, according to Controller John Chiang. While not a positive development, the shortfall was much less than the billions some pundits were predicting several weeks ago. Final figures show the state collected $37.6 billion in personal income tax revenue through April 30. Budget gurus had said in their budget estimates that the total would be $38.3 billion.

One factor that could be contributing to the overestimate of income tax revenue is a practice by the Department of Finance of scoring substantial new revenue from the new expenditures in the budget for Franchise Tax Board auditors. Cal-Tax has consistently criticized this practice, as new auditors will produce zero additional revenue in the year they are hired. It takes time to hire and train new auditors. By the time they get into the field, it will take months or more likely years to close any new audit. Then, there is the lengthy FTB protest process. Any revenue from a new auditor may not materialize for four to five years.

Another problem in scoring revenues from new auditors is that the estimate is based on the average revenue from existing audits, not the marginal additional revenue a new auditor is likely to generate. In past reports, the state auditor has criticized this method of estimating revenue from new auditors.

When this erroneous estimate of revenues is subtracted, the collections prediction would be lower, but more accurate.

No New Taxes Likely, Assembly Speaker Says. Assembly Speaker Karen Bass said May 7 that she sees little chance of the Legislature approving more tax increases to balance the state budget between now and the start of the new fiscal year July 1, no matter what happens in the May 19 special election.

"California, frankly, is going to be in a world of hurt," Ms. Bass said from Washington, D.C., during a telephone conference with reporters. "It's really going to be about devastating cuts. I certainly don't have any illusions that come May 20, if the measures don't pass, that my Republican colleagues will come to the table ready to vote for any type of revenues."

She also said that whatever budget hole legislators find themselves facing after the election, she anticipates it won't take as long to reach agreement on a fix as it has in the past. "After May 19, you will find us working toward a quick resolution," she said. "I don't believe this next round will be something that is long and drawn out. ... I don't think there are tons of options on the table. ... I believe we will act quickly, and quickly to me means before July." (Source: The Sacramento Bee online, May 7.)

Raid on Local Government Funds Is Possible, Governor Indicates. On his Capital Notes blog, KQED radio reporter John Myers said that if the May 19 budget reform measures fail, the governor may propose a $2 billion suspension of the 2004 voter-approved constitutional amendment that protects city and county revenues. Mr. Myers reported that a local government official who participated in a conference call with the governor said the plan would be to borrow as much from local governments as the 2004 measure (Proposition 1A) allows – 8 percent of property tax revenue in the 2008-09 fiscal year, estimated at $2 billion. An aide to the governor confirmed that the idea was discussed. The 2004 measure, strongly supported by the governor, requires that any borrowed money be repaid with interest within three years. The borrowing requires a two-thirds vote of the Legislature. (Source: Capital Notes, May 5.)

Republicans Keep SEIU Contract Measure From Passing Assembly. On May 4, Republicans in the state Assembly blocked legislation that would ratify a labor contract agreed upon by the governor and the Service Employees International Union. Assemblyman Roger Niello led the charge, saying it was "awfully inappropriate" to vote on the contract for the largest state employees' union before the May 19 special election.

Mr. Niello said the voters' decisions on the budget reform measures will have an impact on the state budget, and lawmakers therefore should wait for the outcome before voting on major contracts.

The measure, AB 964 (Assembly Committee on Public Employees, Retirement and Social Security) needed 54 votes for passage, but received only 51, all from Democrats. Sixteen Republicans voted against the bill, and the remaining GOP lawmakers did not vote.

Supporters said the bill will be brought back for another vote. (Source: The Sacramento Bee, May 5.)

Judge Rules That State Can't Divert Money From Redevelopment Agencies. Sacramento Superior Court Judge Lloyd Connelly ruled April 30 that a state plan enacted last year to divert $350 million in local redevelopment funds to the state's coffers is unconstitutional. The lawsuit against the state was filed by the California Redevelopment Association and the city of Moreno Valley's redevelopment agency. The League of California Cities which supported the suit.

The state has made use of redevelopment funds multiple times since 1992, when the state Legislature helped balance its budget by creating the Education Revenue Augmentation Fund, diverting the money to schools. (Cal-Tax: Lloyd Connelly was a Democratic member of the state Assembly, representing the Sacramento area, from 1982 through part of 1992.)

Department of Finance spokesman H.D. Palmer said state officials are reviewing the court's decision and evaluating their options. No decision has been made on whether to appeal the judge's decision, he said. (Source: The Desert Sun, May 2.)

Unfunded Fringe Benefits Pose Risk to State's Credit Rating. California State Auditor Elaine Howle reported April 30 that the costs of state retirees' health and dental benefits pose "significant financial risk" to the state. "The OPEB (other postemployment benefit) liability reported by the State could affect the State's credit rating if the liability grows so large that it overshadows other liabilities in the State's financial statements," the auditor warned in her report. "A weaker credit rating could compound the state's budget problems by increasing the costs of borrowing money when it issues bonds."

In fiscal year 2007-08, the state paid only $1.25 billion of the $3.59 billion annual required contribution for OPEB costs and recorded the difference of $2.34 billion as an OPED liability, the auditor said. This liability is expected to increase to $4.71 billion in fiscal year 2008-09. The auditor noted that the state "has yet to set aside any funds" to cover at least a portion of the costs, and added that "it remains unclear" how the state will manage the risks associated with this growing liability. (Source: California State Auditor's Report 2008-607.)

Cal-Taxletter, May 8, 2009

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