CALI Cash Flow Update 050709

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California’s Cash FlowCrisis: May 2009 Update

M A C T A Y L O R • L E G I S L A T I V E A N A L Y S T • M A Y 7 , 2 0 0 9



L E G I S L A T I V E A N A L Y S T ’ S O F F I C E

A N L A O R E P O R T

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SUMMARYMuch Progress Was Made in February... The February budget package addressed a

$40 billion shortall in Caliornia’s nances, thereby helping the state’s dire cash fow situation.The package also delayed or deerred numerous state payments and allowed over $2 billion o

state special unds to be borrowed by the General Fund on a temporary basis or cash fow pur-

poses. These actions allowed the Controller to end a one-month halt on tax reunds, payments

to local governments, and other payments. The Controller has stated that the state will be able

to pay its bills “in ull and on time” through the rest o the 2008-09 scal year. In addition,

passage o the February package led the Treasurer to resume sales o long-term inrastructure

bonds, and recently, this allowed the state to resume unding or thousands o inrastructure

projects that had been halted due to the cash crisis in late 2008.

…But Cash Flow Pressures Are Likely to Reemerge in Summer and Fall 2009. While the

February budget package eased the state’s cash fow crunch considerably, the budget and cash

pressures o recent months have taken their toll. The General Fund’s “cash cushion”—the mon-

ies available to pay state bills at any given time—currently is projected to end 2008-09 at a

much lower level than normal. Without additional legislative measures to address the state’s s-

cal diculties or unprecedented amounts o borrowing rom the short-term credit markets, the

state will not be able to pay many o its bills on time or much o its 2009-10 scal year. Dete-

rioration o the state’s economic and revenue picture (such as the $8 billion revenue shortall

we orecasted in March) or ailure o measures in the May 19 special election would increase

the state’s cash fow pressures substantially—potentially increasing the short-term borrowing

requirement to well over $20 billion. Caliornia is likely to have diculty borrowing anywhereclose to the needed amounts rom the short-term bond markets based on the state govern-

ment’s own credit.

Prompt Legislative Action Required. Time is o the essence in addressing Caliornia’s cash

fow challenges. In our opinion, the greatest near-term threat to state cash fows would be an

inability by state leaders to quickly address Caliornia’s budget imbalance. I there were to be

a prolonged impasse, the Treasurer and Controller could be prevented rom borrowing su-

cient unds to allow the state to pay its bills on time. In such a scenario, the Controller would

have much less fexibility than he did in February (during personal income tax reund season)

to delay non-priority state payments. An inability to borrow sucient unds by the Controller

and Treasurer could subject many more Caliornians—including local governments, vendors,

and, perhaps, in some dire scenarios, state employees and many others awaiting payments rom

the state—to prolonged payment delays. Payment delays could aect many major state unds

during a prolonged impasse, including the General Fund and special unds, all o which are

unded rom liquid resources in the state investment pool. Such payment delays could subject

the already ragile state budget to even more costs (such as penalties and interest).



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The Legislature’s Options to Address the Situation. We advise the Legislature to reduce the

state’s short-term borrowing need to an amount under $10 billion or 2009-10. (Regular updates

rom the administration on the projected cash fow situation, thereore, will be necessary duringthe upcoming budget deliberations.) To reduce the borrowing need and limit the state’s interest

costs in 2009-10, the Legislature has two very dicult options:

➢ Additional actions to increase revenues or decrease expenditures in order to return the

2009-10 budget to balance.

➢ Additional actions to delay or deer scheduled payments to schools, local governments,

service providers, and others.

Federal Assistance Could Come With “Strings Attached.” We believe it is appropriate or

the Treasurer to explore the possibility o ederal assistance—such as a ederal loan guaran-

tee—to address this summer and all’s grim cash outlook. We caution the Legislature, however,

against assuming such ederal assistance will be available. By taking prompt actions to reduce

the state’s cash fow borrowing need to under $10 billion or 2009-10, policymakers would

enhance the ability o the Treasurer and Controller to secure private investment with or without

a ederal loan guarantee. Moreover, reducing the state’s cash fow borrowing will involve ac-

tions that improve the state’s medium- and long-term budgetary outlook. These actions would

increase condence in the bond markets, which are needed to continue providing unds or

inrastructure projects that spur economic activity and long-term growth. Finally, and perhaps

most importantly, we advise the Legislature and other state policymakers to be cautious about

accepting any strings that might be attached to ederal assistance. Strings attached to recentcorporate bailouts—as well as ederal loan guarantees provided to New York City during its

scal crisis three decades ago—have included measures to remove nancial and operational

autonomy rom executives. We recommend that the Legislature agree to no substantial dimin-

ishment in the role o Caliornia’s elected state leaders. In our opinion, the dicult decisions

to balance the state’s budget now are preerable to Caliornians losing some control over the

state’s nances and priorities to ederal ocials or years to come.



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INTRODUCTION

In January 2009, we published Caliornia’s

Cash Flow Crisis, one o the reports in our

2009‑10 Budget Analysis Series. This report

provides an update on matters discussed in the

January piece. Specically, this report includes

the ollowing sections:

➢ A history o the state’s recent cash fow

problems.

➢ Caliornia’s cash fow outlook.

➢ The Legislature’s options to improve thecash fow outlook.

➢ The possibility o ederal assistance or

the state’s cash fow challenges.

HISTORY OF THE STATE’S RECENT

CASH FLOW PROBLEMS

State Must Borrow or Cash Flow Purposes

Every Year. In Caliornia’s Cash Flow Crisis,

we discussed the basic dynamics o the state’s

General Fund cash fows. Specically, the report

described how the state

generally disburses the

majority o General

Fund dollars in the rst

hal o the scal year

(that is, between July

and December), while it

collects the majority o

General Fund receipts

in the second hal o

the scal year (between

January and June).

As shown in Figure 1

(which uses 2007-08monthly cash fows as

a typical example), this

means that the state rou-

tinely runs monthly cash

fow decits through

the rst hal o the scal

year and monthly cash fow surpluses through

much o the second hal. To address this regular

imbalance o receipts and disbursements, the

state must borrow or cash fow purposes each

Cash Flow Deficits Mark the First Half

Of the General Fund’s Fiscal Year

2007-08 (In Billions)

Figure 1

2

4

6

8

10

12

14

16

$18

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Receipts

Disbursements

Cash Deficit

Cash Surplus



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year: rst, rom internally borrowable resources

(principally, several hundred “special unds” in

the state treasury) and second, rom external

private investors.“Double Whammy” o Weak Revenues and

Credit Crisis Hurt State’s Cash Position. As we

described in our January 2009 report, weakening

state revenues and limited access to the credit

markets in the rst hal o 2008-09 reduced the

state’s resources to address cash fow decits. At

the end o 2008, state ocials halted unding or

thousands o inrastructure projects in order to

conserve state cash resources. Projections at the

time indicated that, absent action by the Legisla-ture or the Controller to conserve cash, available

resources to und normal state operations—also

known as the state’s cash cushion—would be ex-

hausted by the end o February 2009. (The Con-

troller typically aims to have a minimum $2.5 bil-

lion cash cushion in state accounts at any given

time.) At the beginning o February 2009, the

Controller used his authority to begin delaying

certain state payments deemed to be o a lowerpriority under state law, including many vendor

payments, payments to local governments, and

tax reunds to individuals and corporations. By

delaying about $3 billion o payments in Febru-

ary, the Controller was able to conserve the cash

cushion to make other “priority payments” o the

state (such as payments or schools, debt service,

and state payroll) on time.

Legislative Actions Have Eased Cash Crunch

During Second Hal o 2008‑09. The budgetpackage approved by the Legislature on February

19 and signed by the Governor on February 20

addresses a $40 billion budget shortall with a

combination o temporary tax increases, spend-

ing cuts, borrowing, and ederal stimulus unds.

(For more inormation on the budget package,

see our 2009‑10 Budget Analysis Series report

entitled The Fiscal Outlook Under the February

Budget Package.) By their nature, revenue in-

creases, spending cuts, and other budget-balanc-ing actions help the state’s cash situation by put-

ting or leaving more money in the state’s coers.

In addition to these budgetary actions, the Leg-

islature approved a bill—Chapter 9, Statutes o

2009-10 Third Extraordinary Session (AB 13xxx,

Evans)—to make additional, substantial changes

to the state’s cash management practices. This

bill was in addition to similar cash management

legislation passed as part o the original 2008-09

budget package in September 2008.The cash management actions enacted by

the Legislature have played a key role in help-

ing the state meet its priority payments on time

through 2008-09. In total, since the beginning o

the scal year, the Legislature has added unds

with over $6 billion o balances to the list o state

accounts able to be borrowed by the General

Fund temporarily or cash fow purposes. The

Legislature also has deerred several billion dol-lars o payments to later in the 2008-09 and

2009-10 scal years. In addition, through its en-

actment o legislation in March 2009, the Legis-

lature allowed the state to take immediate receipt

o $1.5 billion o ederal stimulus unds or Medi-

Cal, which directly benets the General Fund.

In May 2009, the state will draw down nearly

$800 million o ederal stimulus unds available

to cover costs o the state prison system on an

expedited basis, thereby reducing General Fundexpenditures. Enactment o the February budget

package also helped the Treasurer to execute

an additional $500 million cash fow borrow-

ing with The Golden 1 Credit Union and restart

long-term inrastructure bond sales. Two huge

and extraordinarily successul long-term bond



6



sales in March 2009

and April 2009 raised

over $13 billion or state

projects and allowedthe administration to

end the state project

“unding reeze” that

had been instituted in

late 2008 due to the

cash crisis.

Controller Was

Able to End Previ‑

ously Instituted Delay

o Certain State Pay‑

ments. Due to all o the

cash fow and budget-

ary changes described

above, the Controller

was able to end the

delay o non-priority

state payments. On

March 31, 2009, the Controller stated that the

state government had sucient cash resources to“meet all o our obligations in ull and on time”

through the rest o 2008-09. Figure 2 shows the

Controller’s estimates o the state’s cash cush-

ion in late 2008-09 both beore enactment o

Controller: February Budget Package Eased2008-09 Cash Crunch

Estimated State “Cash Cushion” (In Billions) a

Figure 2

aEstimates are for the lowest amount of cash cushion available to pay state bills on any day during themonths listed.

-6

-4

-2

0

2

4

$6

April May June

Estimates Before February Budget Package

Estimates as of March 31

the February budget package and on March 31,

when he was able to make this statement. The

dramatically improved March 31 gures refect

(1) enactment o the February budget package,

(2) completion o the $500 million short-term

Golden 1 cash fow borrowing, and (3) the accel-

erated receipt o Medi-Cal stimulus unds.

CALIFORNIA’S CASH FLOW OUTLOOK

Administration Projections Indicate a New

Cash Crisis May Lie Ahead. In early March 2009,

the Department o Finance (DOF) prepared anestimate o how the various measures associated

with the package (including the tax increases,

spending reductions, payment deerrals, and

newly authorized borrowable unds) aected

the state’s cash fow outlook through the end

o 2009-10. Even ater including about $1 bil-

lion o extra disbursements in the orecast or

“unanticipated cash risks” through the end o

2008-09, DOF indicated that the budget pack-age had practically eliminated the cash crunch in

the current scal year. The DOF orecast, how-

ever, indicated the possibility o severe cash fow

pressures reemerging as soon as July 2009 and

persisting through much o 2009-10.



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Severely Weakened Cash Cushion at the

End o 2008‑09 Is Expected to be a Key Prob‑

lem. The key problem identied in the DOF

orecast is the likelihood o a severely weak-ened state cash cushion at the conclusion o the

2008-09 scal year. While the budget package

allows the state, in the Controller’s view, to meet

its budgeted obligations on time through the rest

o 2008-09, the DOF orecast shows that the state

cash cushion would be $6.9 billion on June 30.

This is much less than the state typically has in its

cash cushion at the end o a scal year—indica-

tive o the act that the state will most certainly

end the 2008-09 scal year with a budgetarydecit. (The February budget plan anticipated

there being an operating surplus in 2009-10 to

address the 2008-09 budget decit and build

up a reserve account.) Figure 3 shows that the

expected scal year-end cash cushion at June 30,

2009, is roughly one-

hal o the cash cushion

the state had one year

beore and only aboutone-third o the amount

o three years ago. To

put these gures in per-

spective, note that the

year-end cash cushion

or 2008-09 refects

the Legislature’s actions

over the past year to

add several billion dol-

lars o unds to that cashcushion in the orm

o new special unds

eligible to be borrowed

by the General Fund

or cash fow purposes.

Had the Legislature not

taken various budgetary and cash management

actions such as these, the state’s cash cushion

would have been zero at the end o 2008-09.

Potentially Unprecedented Short‑TermBorrowing May Be Required in 2009‑10. A

weakened cash cushion on June 30 is a problem

because o the basic dynamics o the state’s Gen-

eral Fund cash fows displayed earlier in Figure 1.

The state disburses the bulk o its General Fund

expenditures during the rst hal o the scal

year, but collects most o its receipts later. This

means that several months at the beginning o

the scal year have monthly cash fow decits—

that is, months when monthly General Fundreceipts are less than monthly General Fund

disbursements. While the DOF’s March 2009

orecast projects a cash cushion o $6.9 billion

(consisting entirely o borrowable special und

balances—with no available General Fund bal-

2008-09 Year-End Cash Cushion to Be

Much Lower Than in Prior Years

(In Billions)

Figure 3

5

10

15

20

$25

2005-06 2006-07 2007-08 2008-09a

aDepartment of Finance cash flow forecast as of March 2009. Based on assumptions in 2009-10 budgetpackage.



8



ance) as o June 30, 2009, the orecast indicates

that the General Fund is expected to have a

monthly cash fow decit o $7.9 billion in July

2009 alone. The estimated cash fow decit inthat month is so great that DOF estimates the

cash cushion will be depleted under the Febru-

ary budget package unless the Controller delays

state payments once again as he did in February

or the state borrows unds rom private investors.

The state borrows on a short-term basis rom

the credit markets virtually every year by issuing

revenue anticipation notes (RANs). These notes,

along with a related borrowing source—revenue

Revenue A nticipAtion notes (RAns) And Revenue A nticipAtion W ARRAnts (RAW s)

RANs. The state’s most commonly used device or external cash fow borrowing is the

RAN—a low-cost, short-term nancing tool. Typically issued early in the scal year, RANs must

be repaid prior to the end o the scal year o issuance (usually in April, May, or June). Unlike

most o the state’s long-term inrastructure bonds, RANs are not state general obligations. The

RANs are secured by money in the General Fund that is available ater providing unds or the

state’s “priority payments,” such as payments to schools, general obligation debt service, and

state employee payroll, among other payments. The State Treasurer’s oce works with nancial

rms to issue RANs almost every year. The state has sold $5.5 billion o RANs to investors dur-

ing 2008-09.

RAWs. The state has issued RAWs or cash fow relie occasionally since these securities

were created during the severe state budget crisis o the early 1930s. The main reason that the

state resorts to RAWs is that they can be repaid in a subsequent scal year ater their issuance.

In act, one Caliornia RAW issued in July 1994 matured 21 months later. The ability to have a

later maturity date means the state can borrow or cash fow purposes even i the state’s cash

outlook is challenging in the near term. Because o this longer maturity schedule and the actthat RAWs typically are issued when the state aces challenging budget times, they generally are

more costly—with higher interest and other issuance costs—than RANs. The state’s $7 billion

o RAWs in 1994, or example, resulted in interest and other issuance costs o over $400 mil-

lion, and the $11 billion o RAWs in 2003 resulted in over $260 million o costs. The State

Controller’s oce works with nancial rms to issue RAWs.

anticipation warrants (RAWs)—are described in

the nearby box.

A huge concern is that monthly cash fow

decits o varying amounts are expected un-der the February budget package every month

between July 2009 and November 2009. These

ve consecutive months o monthly cash fow

decits mean that, under the DOF orecast, the

state would need to borrow amounts that could

grow to well over $13 billion by about October—

probably through issuance o RANs or RAWs—

in order to pay all bills on time and maintain

the state’s traditional minimum cash cushion



9



o $2.5 billion. Figure 4 summarizes DOF’s

March 2009 cash fow orecast by showing

the expected end-o-month state cash cushion

throughout 2009-10 beore considering any bor-rowing rom private investors. The orecast shows

the state’s accumulated cash decit—illustrated

in Figure 4 as the “negative cash cushion”—

would reach $10 billion to $11 billion or much

o the middle part o 2009-10. The state, there-

ore, might need to borrow over $13 billion rom

investors in order to pay all currently budgeted

bills on time and maintain the target minimum

$2.5 billion cash cushion described above.

Some Negative Signs Have Emerged Since

the March Cash Forecast. Figure 5 lists several

developments or the state’s cash fow situation

that have emerged since DOF completed its ore-

cast in March. Some o these developments have

been good news. For example, the Controller re-

ported that, through the end o March, amounts

in borrowable special unds were running about

$2 billion higher than orecast. (It is not known

whether this will be a sustained trend.) In ad-dition, as described earlier, about $800 million

o ederal stimulus moneys or corrections was

received earlier this month—over one year in

advance o its expected date o receipt based

on the DOF March orecast. (While legislative

action allowed the state to expedite receipt o

certain Medi-Cal unds rom the ederal gov-

ernment, this already was actored in DOF’s

2009-10 cash fow orecast.) On the other hand,

more than osetting these positive develop-ments has been a variety o negative economic

and state revenue data, which led our oce to

project in March 2009 that General Fund rev-

enues in 2009-10 would be about $8 billion

below those assumed in the February budget

package and DOF’s

March cash orecast.

(Because o the timing

o state receipts, a losso $8 billion in annual

revenues does not nec-

essarily mean the state

needs to borrow the

same $8 billion to keep

paying bills on time in

each month.) Net state

receipts o personal

income and corporate

tax payments in April2009 also were weaker

than expected—adding

to poor February and

March revenue collec-

tions. Ater considering

these developments and

March 2009 Forecast Projected Huge Deficit in the

State’s Cash Cushion Through Much of 2009-10a

(In Billions)

Figure 4

aThis figure shows the projected amounts in the state’s cash cushion on the last day of each month based onthe February budget package before consideration of any short-term borrowing from pr ivate investors.

-12

-10

-8

-6

-4

-2

0

2

$4

July September November January March May



10



assuming that higher amounts in borrowable

special unds persist, we can make a rough esti-

mate that the state’s borrowing requirement rom

private investors in 2009-10 may be somewherearound $17 billion—or $4 billion higher than

orecast by DOF in March. Further projected

revenue declines or expenditure increases could

add to this borrowing need, including the voters’

possible rejection o Propositions 1C, 1D, and 1E

on the May 19 ballot. As shown in Figure 5, re-

jection o these measures could cause the state’s

2009-10 investor borrowing requirement to swell

to around $23 billion.

Borrowing Well Over $13 Billion on the

State’s Own Credit May Not Be Possible. O-

cials o the administration, the Treasurer’s oce,

and the Controller’s oce meet regularly with

representatives o nancial institutions and insti-

tutional investors in the municipal credit markets.

Despite the state’s recent

successes issuing bonds

in the long-term credit

markets, the major nan-cial institutions reported-

ly have indicated to state

ocials that Caliornia

will have diculty bor-

rowing $13 billion rom

the short-term markets

based on its own credit

in 2009-10—let alone

the much larger amount

o around $23 billion dis-cussed in Figure 5. There

are various reasons why

the state may have di-

culty borrowing such

large amounts:

➢ First, this would be an unprecedented

amount o short-term borrowing or the

state. State short-term borrowing reached

a peak o just under $14 billion—raisedthrough issuance o both RANs and

RAWs—during 2003-04, but this oc-

curred during a period o relatively easy

credit availability. Then, liquidity in the

short-term credit markets was healthy

(unlike in recent months) and credit stan-

dards o investors and banks were less

restrictive than they are now.

➢ Second, the amount o borrowing asa percentage o state receipts—over

13 percent or a $13 billion short-term

borrowing—is at least double the maxi-

mum typically recommended by mu-

nicipal bond market credit experts. This

means it is likely that RAWs or RANs

Figure 5

State’s 2009-10 Short-Term Borrowing Need

(In Billions)

Administration's March Cash Forecast $13

Known developments since March cash forecast

Higher amounts in borrowable special funds (as of March 31) -$2Expedited receipt of federal stimulus funds for corrections -1Lower revenue receipts from February to April 2009 3

Possible need based on LAO's forecast of lower 2009-10 revenuesa 4

Subtotal ($4)

Rough Estimate Based on Known Developments Since March $17

Effect if Propositions 1C, 1D, and 1E Are Rejected by Voters $6Rough Estimate if Proposition are Rejected by Voters $23

a In a March 2009 report we forecast that General Fund revenues would be $8 billion below theFebruary budget package forecast in 2009-10. Because some of this difference affects state receiptsin April through June 2010, when state cash flows are relatively strong, this difference would not likelyresult in an $8 billion increase in the state's needed borrowing from short-term investors. Instead, thedecrease in revenues should result in a smaller increase in the state's borrowing need. We show$4 billion here as a very rough estimate.



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totaling over $13 billion would have a

poor credit rating. With weakened banks

and other nancial institutions limited in

their ability to oer credit enhancement(essentially, a type o bond insurance) to

the state’s RAWs or RANs, a low rating

will mean that major segments o the

short-term investor market will be unable

or unwilling to participate in the state’s

2009-10 cash fow borrowing. With resh

memories o their own liquidity crisis last

year, major short-term market investors—

such as money market unds—have

stricter credit standards than ever beore,

and they may be reluctant to purchase

RANs or RAWs with a low rating. Eveni investors did purchase the securities,

state interest costs or borrowing may

exceed budgeted amounts—potentially

by as much as hundreds o millions o

dollars—as the administration warned

the Legislature in a budget letter submit-

ted in early April 2009.

RECOMMENDATIONS AND OPTIONS

FOR THE LEGISLATURE

In this section, we address ways that the

Legislature can address the state’s cash fow

crisis. First, we discuss broad goals concerning

state cash fows or the Legislature to consider in

its upcoming budget deliberations. Second, we

discuss specic options that the Legislature may

need to consider to achieve these goals. Third,we discuss the important issue o timing: when

the Legislature needs to take action to provide

the greatest possible assurance that the state can

continue paying its bills on time.

Broad Goals for the Legislature

Concerning State Cash Flows

Recommended Legislative Goal: Reducing

State’s Need or Short‑Term Borrowing. While

the state’s recent success in selling long-term

inrastructure bonds and resuming unding o

voter-approved projects is a positive sign, we are

concerned about the potential diculty and high

costs involved in borrowing $13 billion or more

or cash fow needs in 2009-10. Accordingly,

we recommend that the Legislature ocus in the

coming weeks on a goal o reducing the state’s

cash fow borrowing need or 2009-10 to some-

where below $10 billion. In any scenario, this

will make it easier or state ocials to execute the

state’s cash fow borrowing. To accomplish this

goal, the Legislature will need to ask the admin-istration or regular updates on projected cash

fows during its upcoming budget deliberations.

Reducing Short‑Term Borrowing Need Be‑

low $10 Billion Means More Difcult Choices.

Just as the Legislature aced dicult choices earli-

er in 2008-09 to balance the budget and address

the cash fow crisis, even more dicult choices

remain or returning the budget to balance and

reducing the 2009-10 cash fow borrowing need

below $10 billion. The options or the Legislature

to accomplish this t into two general categories:

➢ Budgetary actions to increase revenues

or decrease expenditures o the General

Fund or other state unds available or

cash fow borrowing.



12



➢ Cash fow actions to delay budgeted

state payments or accelerate receipt o

revenues rom either the General Fund or

borrowable special unds.

Returning the Budget to Balance Would

Help the Cash Flow Situation. By their nature,

actions to increase state revenues or decrease

expenditures help the cash fow situation, there-

by reducing the required borrowing rom short-

term credit markets. Accordingly, we recommend

that the Legislature ocus rst on addressing the

budget decit. However, because budgetary

balancing actions will not necessarily delivertheir ull benet in the opening months o the

scal year—when the state’s cash fow problems

are the greatest—balancing the budget alone

may not solve the state’s cash fow diculties.

Additional actions to deer payments or acceler-

ate state receipts during the scal year may be

necessary.

Specific Options for the Legislature to

Achieve These GoalsBeyond the very dicult choices or the

Legislature in returning the 2009-10 state budget

to balance, there are some particular options that

lawmakers may need to consider to address the

state’s cash fow challenge.

Additional Payment Deerrals May Be Nec‑

essary. Because state payments to schools rep-

resent a large portion o General Fund disburse-

ments in cash fow decit months like July and

October, additional measures to delay scheduled

state payments to schools may be necessary. De-

errals o scheduled payments or various other

programs also may be required. To the extent

that ederal stimulus unds are available to school

districts and other local governments by early in

the 2009-10 scal year, this may help govern-

mental entities cope with additional payment

delays.

Accelerating Issuance o Lottery Securitiza‑

tion Bonds May Prove Benefcial. The DOF cashprojections assume that the state receives $5 bil-

lion o lottery securitization proceeds—con-

tingent upon voter approval o Proposition 1C

in May 2009—in March 2010. To ease the all

2009 cash crunch somewhat, we recommend

that the Legislature encourage the administra-

tion, which would control the lottery borrowing

process under Proposition 1C, to pursue issuing

some or all o the lottery securitization bonds by

October 2009. The lottery borrowing—a long-term bond market oering—would reduce the

need or issuance o short-term state obligations

by the Treasurer or Controller by perhaps a ew

billion dollars in the all. Reducing the size o

these short-term obligations would make it easier

or state ocials to market securities to short-

term investors.

“Trigger Legislation” May Be Required. In

our January report on the cash fow crisis, wediscussed the possibility that so-called trigger leg-

islation might be needed to acilitate the sale o

RAWs by the Controller. In the past, trigger leg-

islation—such as Chapter 135, Statutes o 1994

(SB 1230, Committee on Budget and Fiscal Re-

view)—has helped the state sell short-term cash

fow instruments by providing greater assurances

to potential investors. Chapter 135 required the

state to reduce most categories o expenditures

at the time i cash fow projections showed thattimely payment o RAWs was threatened. Given

the need to preserve the Legislature’s consti-

tutional prerogatives over the state budget, we

would be reluctant to recommend passage o

trigger legislation that ceded to the Governor the

ability to determine which revenues were in-



13



creased or expenditures decreased to provide as-

surances to investors o timely RAW repayment.

Instead, assuming such legislation proves neces-

sary, we advise the Legislature—as it did in theFebruary budget package in constructing a rev-

enue and expenditure trigger tied to the receipt

o ederal stimulus moneys—to speciy which

expenditures would be decreased and revenues

increased in any RAW trigger legislation.

Action by Late June or Early

July at the Latest Is Needed

Time Is o the Essence in Addressing Cash

Flow Problems. Addressing the state’s cash fowchallenges is inherently a matter o timing. For

the state to have sucient unds to make General

Fund and special und payments on time, access

to sucient borrowed unds—rom both internal

sources and private investors—is needed by a

given date. The DOF projections under the terms

o the February budget package show that the

state will need to begin borrowing rom private

investors in the short-term credit markets in July.Under this package, a total o well over $13 bil-

lion in private borrowing likely would need to

be completed by October. As discussed earlier,

the state may ace a major new budgetary gap

that will also worsen the state’s cash situation.

Absent legislative actions to rebalance the budget

and address the state’s budgetary and cash fow

diculties, private investors may be unwilling

to lend the state such large sums. Thereore,

legislative actions to return the budget to bal-ance and address the state’s cash fow challenges

may be required beore the Treasurer and Con-

troller can issue the required amount o RANs

or RAWs. Accordingly, in our view, the most

signicant near-term threat to the state’s cash

fows is a prolonged legislative impasse in ad-

dressing Caliornia’s budget diculties ater the

May Revision. The Controller and Treasurer will

have the greatest ability to issue sucient RANs

and RAWs in a timely ashion i the Legislature

restores the budget to balance and takes action

to reduce the state’s short-term borrowing need

by late June 2009 or early July 2009 at the latest.

By taking action on this timeline, the Legislature

would allow state ocials to begin to access the

short-term credit markets in early or mid-July. In

any event, the earlier the Legislature takes action

ater the special election to address the state’s

budget and cash problems, the less likely thatthe Controller will have to resume delaying state

payments in order to preserve cash or timely

disbursement o priority payments, such as pay-

ments to schools and bondholders.

THE POSSIBILITY OF FEDERAL ASSISTANCE

Treasurer Exploring Federal Assistance,Such as a Federal Guarantee or RANs or

RAWs. Given the possible diculty or the state

marketing a vast amount o short-term notes or

warrants, the Treasurer’s oce has indicated that

it is exploring potential ederal assistance or the

state (and other public entities) that need to ac-

cess the short-term debt markets. We believe thatit is appropriate or the Treasurer to explore these

options with ederal ocials. Among the options

or possible ederal assistance are:

➢ A ederal guarantee o the state’s short-

term cash fow borrowing.



14



➢ A ederal commitment to purchase the

state’s RANs or RAWs rom investors

in certain circumstances, perhaps using

unds o the Troubled Assets Relie Pro-gram approved by Congress in 2008.

➢ Accelerated receipt o ederal stimulus

moneys that oset state General Fund

expenditures, which could reduce the

state’s need or cash fow borrowing in

2009-10.

Recently, the U.S. government has assisted vari-

ous nancial institutions and corporate entities

acing insolvency. In addition, there is precedent

or a ederal guarantee o a public entity acing

serious nancial diculties. In 1978, the Con-

gress passed and President Carter signed the

New York City Loan Guarantee Act, a response

to the city’s severe scal crisis at the time. A

properly structured ederal loan guarantee o

this type would allow the state relatively simple

access to the bond markets. Such bond market

access would be based on the U.S. government’sull aith and credit. A guarantee may require ap-

proval by the Congress in a bill, which would be

subject to approval or veto by the President.

Recommend That Legislature and Policy‑

makers Be Cautious About Strings Attached to

Federal Assistance. Given recent experience,

it is likely that any substantial ederal assistance

or Caliornia’s cash fow problems would come

with conditions. Recent ederal bailouts o pri-

vate entities have involved those entities losing

at least some operational autonomy to ederal

ocials. At the very least, as occurred with

New York City’s loan guarantees in the 1970s,

the ederal government likely would charge the

state a ee or a ederal loan guarantee—just

as a bank or bond insurer guaranteeing state

debt obligations would. Nevertheless, the ed-

eral government also could insist on a binding,

multiyear budget balancing plan rom the state

or the ability to assume some sort o operationalcontrol or oversight o state operations in certain

cases. For example, the New York City guarantee

act required the city to submit to the Secretary

o the Treasury a plan or balancing its budget

within roughly our years and mandated that

an independent scal monitor “demonstrate to

the satisaction o the secretary that it has the

authority to control the city’s scal aairs dur-

ing the entire period in which ederal guarantees

are outstanding.” The state-created scal control

board that oversaw New York City’s nances

remains in existence to this day, although many

o its powers under state law have expired. In

short, the Legislature and policymakers should

expect that there would be strings attached to

ederal assistance. While the severe nature o the

state’s cash fow problems necessitate consider‑

ing an oer o ederal aid, we recommend that

the Legislature be very cautious about accepting ederal aid with strings attached that undermine

the ability o this Legislature or uture Legislatures

to set the state’s scal and policy priorities. We

recommend that the Legislature agree to no sub-

stantial diminishment o the role o Caliornia’s

elected state leaders. In our opinion, the dicult

decisions to balance the state’s budget now are

preerable to Caliornians losing some control

over the state’s nances and priorities to ederal

ocials or years to come.Legislature Should Not Assume Federal As‑

sistance Will Be Forthcoming. We recommend

that the Legislature not proceed with the assump-

tion that ederal assistance will be orthcoming to

deal with this summer and all’s state cash fow

problems. By beginning to address the state’s



15



budget and cash fow challenges immediately

ater the May special election, the Legislature

will give the Treasurer and Controller the greatest

range o options to address the state’s expectedcash fow challenges. Moreover, the Legislature’s

prompt actions to return the budget to balance

and reduce the cash fow problem may help

convince ederal ocials that temporary assis-

tance to the state is justied.

CONCLUSIONWhile the February budget package and

earlier legislative decisions have helped ease the

state’s cash crunch during 2008-09, major chal-

lenges or the state’s cash fows loom in the sum-

mer and all o 2009. In our opinion, the greatest

near-term threat to the state paying its budgetedbills on time would be a prolonged impasse by

the state in addressing Caliornia’s budgetary

and cash fow challenges ater the May special

election. Moreover, we recommend that the

Legislature not proceed with the assumption that

ederal assistance will be available to help the

state address its cash fow crisis. Accordingly, we

recommend that the Legislature:

➢ Focus in the coming weeks on reducing

the state’s cash fow borrowing need or

2009-10 to somewhere below $10 billion.

➢ Act quickly—by late June or early July at

the latest—to address the state’s budget

and cash fow challenges in order to help

the Controller and Treasurer access the

short-term bond markets beginning in

July.

➢ Consider additional cash management

measures, including possible additional

delays in scheduled payments and accel-

eration o receipt o lottery securitization

proceeds.

➢ Be very cautious about accepting ed-

eral assistance or the state’s cash-fow

problems, especially given the strings that

may be attached to such aid.

16 L E G I S L A T I V E A N A L Y S T ’ S O F F I C E

LAO Publications

This report was prepared by Jason Dickerson, and reviewed by Michael Cohen. The Legislative Analyst’s Ofce

(LAO) is a nonpartisan ofce which provides fscal and policy inormation and advice to the Legislature.

To request publications call (916) 445-4656. This report and others, as well as an E-mail subscription service,

are available on the LAO’s Internet site at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000,

Sacramento, CA 95814.


CALI Cash Flow Update 050709

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