State Controller John Chiang On California Cash Concerns

CC: Did this latest budget solve the long-term gap between spending obligations and revenue? 

JC: No. My principle concern is what takes place next year. We still have significant cash issues. In fact, the cash issues appear to be greater next year than the ones we just experienced. 

CC: When you say cash issues that means what? 

JC: At one point, we would have been in the red in excess of $5 billion as early as April. This budget and its cash solutions reduce that $5 billion cash deficit in April to $636 million. We’re working with (State Treasurer Bill) Lockyer and the governor to secure a RAN (Revenue Anticipation Note) of $1.5 billion to cover that gap and continue to make essential payments. A major credit union has said it will cover at least one third of that so we’ll get at least some of what we need for sure. 

CC: Why is it so bad so soon? 

JC: In different times, a sound budget will produce cash so that you can move without great difficulty. Unfortunately, since we had the budget that didn’t work at the beginning of the year, the one that was 85 days late. The Legislature and governor waited so long to address our fiscal issues that our solutions became narrower. We didn’t have time to put in the income tax solution, the sales tax solution or spending cuts for this entire fiscal year. The first tax to go into effect is the sales tax on April 1. And you can’t start the income tax until the next tax year. 

Sitting on the Board of Equalization you always try to start a sales tax at the beginning of a quarter so you don’t make it more complicated for the 1 million people who have permits with the board. Without the taxes, it would have to be all spending cuts in order to reduce obligations to have more cash available. That’s why they should have got the first budget right. We lost all that time from September and February.  And there weren’t enough spending cuts taking place where we could resume paying the state’s obligations during the month of February. 

CC: How many obligations in February? 

JC: $2.8 billion. 

CC: Of that, tax refunds are? 

JC: $2 billion. Actually, we’re starting to process tax refunds today. (March 6, 2009) We got some revenue numbers from the governor on Tuesday. My staff has been doing stress testing and cash projections and feel pretty comfortable so we’re moving on it today. 

CC: Is February a big month for obligations? 

JC: No. April is the real difficult month. If we don’t get that RAN, we’re $636 million in the red. But then the bigger issue is July. When we walk into the next fiscal year we will need a massive cash infusion. 

CC: How come? 

JC: We always borrow at the beginning of the year, 25 out of the last 26 anyway and then in April we make up the difference. But this year we walk in with weakness into the next fiscal year. There are less tools in the tool kit.  We’ll need a massive RAN or RAW (Revenue Anticipation Warrant). 

Remember these last budgets borrow $16.5 billion from (state) special funds to backfill the general fund. So if we have any emergency in the state requiring aid from one of those special fund departments, the state is in trouble. Over 1,100 special funds in the state and we borrowed from over 650 of them. Part of this last budget solution gives us the ability to borrow another $2 billion more. The governor’s budget has us borrowing $11 billion from special funds over the next 18 months. 

So we’re going to have to do some outside borrowing for the next fiscal year. Period. 

CC: OK, so the most recent budget is better than the one from September. 

JC: Far better. 

CC: But it doesn’t solve the fundamental problems. 

JC: Not even close. This budget doesn’t anticipate if we have further deterioration in the state revenue situation. They’re going to probably find themselves out of balance because the economy is getting a lot worse. 

The current numbers are based on November and December.  Look at more recent numbers. Within the last few weeks, the national Gross Domestic Product was revised from its original minus 3.8 down to minus 6.2. Unemployment was a little over 8 percent last November. Now it’s at 10.1 percent. They ought to have solutions in place already for next year’s budget to anticipate a weakening economy. 

We had bad numbers for the month of February — $900 million less than expected. The disbursements came in light. It could have been a lot worse. But it’s still a $900 million net loss to the state budget. 

CC: February is a big collection month? 

JC: No. But just to be that short is pretty dramatic. 

CC: Is this new flexible furlough better than the fixed Friday one? 

JC: It’s better for the administration of state agencies, yes. It gives agency heads the ability to better consider workload issues. 

CC: There’s a press release on your website about the state’s very sizable tab to cover future costs of health care for retired workers. How should the state address that? 

JC: The governor and Legislature should act. They should start to pre-fund. Instead of go on a pay-as-you-go system, take advantage of investment markets to drop overall costs to the taxpayers of California. And they ought to be working on how you devise a health care system that drops costs, looking at experience-based medicine, new metrics, so costs get driven down. Health care costs are the fastest growing component of the national GDP. If they grow too fast it will put us in a position where we trail globally in our ability to compete economically. 

One of the main recommendations of the governor’s commission on post employment costs was pre-funding. That hasn’t been done. The report you’re talking about shows a marginal increase in health care costs over 30 years over the first report. Something like $48.2 billion versus $47.8 billion. But the reason its marginal is more because of action taken by CalPERS to drop the health care trend rate. It will continue to go up if you don’t take action to address it. We need to look at the underlying costs and other items that drive up health care costs. 

CC: Are there any cities, counties, locals that pre-fund? 

JC: There are a few cities and counties. It’s going to be a challenge over the next few years for a lot of these jurisdictions to either pre-fund or pay-as-you-go. All asset classes were in the red last year. Nationally, whether it was a public pension plan or a foundation or a private university, people took losses in excess of 20 percent. 

CC: Our money guy likes to call it “harvesting” losses. Supposedly that sounds better. 

JC: Ours says we can take your gains and losses and subtract from the losses. I say I’d rather pay taxes on my gains, thanks. 

CC: How do we get out of this mess? 

JC: Everybody in the state has to focus on basic economic costs: health care, pensions, educational investment, infrastructure. The three inputs that really drive an economy are education, infrastructure and financial structure. All of those are struggling here in California. It’s not like coming out of any bad recession because this isn’t a normal business recession; it’s a financial crisis. So we need to find positive inputs to move us forward. 

-30-