A Sorrowful Symmetry

On May 11, Gov. Arnold Schwarzenegger sent a letter to legislative leaders saying that, rather than wait until after the results of the May 19 special election he would present his revised budget plan on May 14. 

There is no doubt that on May 14, the GOP governor will unveil a litany of horrendously awful actions to close what he now estimates to be a budget gap for the fiscal year beginning July 1 of $15.4 billion. This new problem  after a budget he signed February 20 was supposed to close a nearly $42 billion difference between revenues and spending commitments. 

Two weeks within that budget’s signing, the Legislative Analyst said it was $8 billion out of balance. 

(Editor’s Note: In early April, California’s Capitol said to expect at least a $16 billion hole.)

Schwarzenegger has said he will propose two spending plans, one if the budget-related measures pass — Propositions 1C, 1D and 1E — and another if they don’t.

In his letter to lawmaker,s the governor said the $15.4 billion hole will deepen to $21.3 billion if the propositions fail.  

Coupled with that cash hole of $21.3 billion — polls suggest the propositions will fail — is an unparalleled cash flow crisis. Because most of thee state’s payments to schools, local governments and the like occur in the first six months of the fiscal year and most of the revenue is banked the second half of the year, short-term borrowing to cover the state’s obligations is needed.

The problem is that because revenues are so low, there is no cash cushion within the state’s budget. Unable to borrow from various funds and repay them later because those funds are tapped, the state, by the Legislative Analyst’s estimate, requires upwards of $23 billion to pay its obligations.

The Analyst’s recommendation is that lawmakers and the governor cut that number down to below $10 billion but the report is short on specific recommendations on how to do so. 

Even if that is done, is a state that, less than three months ago, closed a budget gap of $42 billion only to face a new one of potentially $21.3 billion going to see a plethora of purchasers for its short term paper?

State Treasurer Bill Lockyer is trying to sweeten the pot with a federal guarantee of California’s cash flow borrowing. Basically the deal is this: If it looks like the state can’t make its note-holders whole, the federal government will.

It’s unclear what, if any, action has been taken by California’s congressional delegation, the largest in the country, to secure this federal guarantee. 

Either way, a new $21.3 billion hole in the budget coupled with a $23 billion cash flow need is a sorrowful symmetry.

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