State Budget:
Absent Action, State Will Run Out of Cash in March, Controller Warns

The state will run out of cash in March unless the Legislature and governor take steps to address cash-flow issues, Controller John Chiang warned in a January 13 letter to legislative budget leaders.

The controller said the liquidity shortfall is projected to last between February 29 and about April 13, and that $3.3 billion worth of cash solutions are needed to address liquidity needs during this period.

If left unaddressed, the state's general fund balance will fall below the $2.5 billion minimum safety cushion on February 29. On March 1, cash will be exhausted and will continue to decline until hitting a low of negative $730 million on March 8, the controller said.

The controller wrote: "The potential cash problem we face in the current year is linked to expenditures and receipts which are tracking differently from those projected when the 2011-12 Budget Act was enacted. As of December 31, 2011, total receipts are coming in $2.6 billion less than forecasted, and expenditures are $2.6 billion more than assumed. Together, both of these components translate into a $5.2 billion reduction in cash resources."

The controller said he has worked with the state treasurer and the Department of Finance to craft a cash-management plan that would avoid delays in paying tax refunds or issuing IOUs, as was required in 2009.

The controller said he supports SB 95 (Senate Budget and Fiscal Review Committee), which was amended January 30 to increase the availability various funds that could be used as borrowable resources for the state general fund for cash flow purposes.

"Although this cash management plan relies on still more borrowing, payment delays and deferrals, we believe this is the most prudent and responsible course of action considering we have about four weeks before the advent of the cash shortfall," Controller Chiang wrote. "It is not an ideal solution, but it is the best way to manage the challenge without relying on IOUs or delaying tax refunds – actions that can disrupt the delivery of essential public services and slow California's economic recovery."

In other budget news:

Some Budget Trailer Bill Language Released. Governor Brown's Department of Finance this week unveiled some, but not all, of the proposed budget trailer bill language that would implement the governor's 2012-13 budget. The language is posted online here.

One bill (201) expands the Financial Institutions Record Match, now used by the Franchise Tax Board, to the State Board of Equalization and the Employment Development Department. Another (204) changes the payment day of the sales tax and insurance tax from the last day of the month to the 24th day of the month.

Another bill (202) establishes a two-tier annual vehicle registration fee. For taxpayers who renew in person, with Department of Motor Vehicles assistance, the fee will be $46. For taxpayers who use alternatives for registration (mail, online, etc.), the fee will be $41.

Another trailer bill (309) increases the unemployment insurance employer surcharge, and one (306) increases court user fees.

It is not known how much of the language will be used by the Legislature as lawmakers enter the early stages of crafting their own budget legislation.

Judge Blocks Cuts to Medi-Cal Providers. A federal judge in Los Angeles ruled January 31 that the state cannot proceed with a budgeted 10 percent reduction in Medi-Cal payments to doctors, dentists, ambulance services and others who care for low-income patients. The judge ruled that the estimated $623 million budget reduction – approved by the Obama administration last year after it was enacted by the Legislature and Governor Jerry Brown in AB 97 (Assembly Budget Committee) – could violate federal law.

U.S. District Court Judge Christina Snyder wrote: "Plaintiffs have proffered substantial evidence that Medi-Cal providers will reduce or eliminate their services in response to the implementation of the rate reduction, suggesting that at least some beneficiaries would suffer reduced access to services." The judge also agreed with plaintiffs that the methodology by which the state analyzed the cut's potential impact on beneficiary access to physician and clinic services "was likely fundamentally flawed."

The cut was challenged by the California Medical Association, the California Dental Association and other groups representing Medi-Cal providers. (Source: U.S. District Court decision in California Medical Association, et al. v. Toby Douglas, et al., Case No. CV 11-9688 CAS (MANx), January 31.)

February 3, 2012
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