Thursday, June 11, 2009

California Less Than 50 Days From Meltdown

From The California State Controller’s Office: Controller Releases May Cash Flow Figures

SACRAMENTO – State Controller John Chiang today released his monthly report detailing California’s cash balance, receipts and disbursements in May and through the first 11 months of the fiscal year. In May, revenue was $827 million below the latest projections found in the Governor’s May Budget Revision.

"Without immediate solutions from the Governor and Legislature, we are less than 50 days away from a meltdown of State government. This presents a terrible threat to California’s economy and to the State’s delivery of basic public services,” said Chiang. “A truly balanced budget is the only responsible way out of the worst cash crisis since the Great depression.”

Personal income taxes were $475 million below (-23.0%) estimates in the May Revision. Corporate taxes were down $84.4 million (-25.8%), and sales taxes fell by $109 million (-3.3%).

The Controller has met with Governor Schwarzenegger and Legislators in the past week to brief them on the State’s immediate cash problem. He also sent a letter to State leaders this morning with new cash projections – updated to reflect May actuals and final May Revision numbers from the Department of Finance – that continue to show the State exhausting all available cash by late July. The State is now projected to run $2.78 billion into the red on July 31.

The State started the fiscal year with a $1.45 billion cash deficit, which grew to $19.8 billion on May 31, 2009. That deficit is being covered by a combination of Revenue Anticipation Notes (RANs) and internal borrowing from special funds. Borrowing from special funds is expected to provide enough cash to fund State operations through the end of the fiscal year on June 30.

May 2009’s financial statement and the summary analysis can be found on the Controller’s Web site at

Economist’s Free Exchange writes The trouble with California

The dual nature of the crisis has created a bit of a headache for Washington policymakers. Constraints on state budgets mean that they're unable to run countercyclical deficits in recession. The federal government can, however, and it is entirely appropriate for it to run deficits in order to fund state programs during a downturn. But Washington is understandably reluctant to save California's hide with a sufficiently large cash injection, because of the structural nature of the state's problems. Save California, it's argued, and they'll never have to come to terms with and repair their broken government. What's more, other states will be encouraged to budget irresponsibly and will require larger disbursements from the federal government next time around. Moral hazard abounds.

The response to this, on the other hand, is that California is simply too big to fail. And truthfully, it is. California is the world's eighth largest economy, and it contributes roughly an eighth of total American output (and drives much of the output in surrounding states). It's very difficult to imagine the European Union standing by and allowing a budget crisis to ravage the German economy, or the IMF doing nothing at all to assist a Russia or a Brazil as they melted down.

Were California forced to make significant cuts to its spending, the ramifications could be quite serious. School systems and universities would be endangered (which would threaten the state's long-term economic prospects). Increases in crime, homelessness, and serious poverty would encourage residents to leave. Service cuts could threaten key industries. In short, the recession could grow far more serious in the state than it already is. That would threaten recovery across the nation.

The best approach to the problem is similar to the best approach to troubled financial institutions. If it is understood that help will be forthcoming for the state or firm in question, then two things have to happen. First, procedures for when and how to intervene must be put in place. And secondly, there must be the establishment of authority to extract concessions from the party being assisted.

Mish writes: California 50 Days From Financial Meltdown

Borrowing from expected revenues is foolish anytime. When expectations have been as ridiculously optimistic as they have been for years, "foolish" is no longer the operative word. The operative word is "insane".

State Controller John Chiang says: “A truly balanced budget is the only responsible way out of the worst cash crisis since the Great depression.”

I agree. Now when does the California legislature get the message?