By Tim Yaryan, Legislative Counsel and Advocate

The voters decisively rejected Propositions 1A through 1E, so now the Governor and the Legislature will have to grapple with closing a $21.3 to $24.3 billion deficit to balance the 2009-2010 Budget deficit.  The more immediate problem is that, before the end of July, the state will run out of cash.  It will need to borrow nearly $20 billion in cash at a time when the state’s credit rating is literally “in the toilet.”  Addressing this huge fiscal crisis is likely to pervade both the politics and policy at the Capitol.  If some public employees didn’t like the budget package the Legislature and Governor had adopted, sadly, they will like even less the revisions that will be made to the 2009-2010 Budget.

State Will Run Out of Cash in July

Controller John Chiang (D) has said that the state will have enough cash to pay its bills through the 2008-2009 fiscal year, which ends June 30.  However, an analysis by the Legislative Analyst states that California will run out of money by the end of July.  The Department of Finance projects that the General Fund is expected to have a monthly cash flow deficit of $7.9 billion in the month of July 2009 alone, which will more than consume all available state cash reserves.  Monthly cash flow deficits of varying amounts are projected under the February budget package for every month between July 2009 and November 2009.  Such deficits would force the State Controller to either borrow externally or delay state payments, as he did in February and last summer, to cities and counties, school districts, social service providers, vendors, and others who count on state payments.  The Legislative Analyst estimates that these five consecutive months of monthly cash flow deficits means that the state will be required to undertake an unprecedented $20 billion in short-term borrowing by October in order to pay all bills on time and maintain a minimum “cash cushion.”  “California is likely to have difficulty borrowing anywhere close to the needed amounts from the short-term bond markets based on the state government’s own credit,” states a recent report by the Legislature.  The state was seeking federal guarantees to underwrite Revenue Anticipation Warrants (RAWS) that it would need to borrow the money, but the Secretary of the Treasury Tim Geithner declined, stating that it would take an Act of Congress to legally underwrite those notes.  That is unlikely to happen given the short time period.

Bankruptcy Ahead?

Given this dire fiscal situation, many people are wondering whether bankruptcy is in store for the State of California, and perhaps whether the state would take bankruptcy action similar to what the City of Vallejo did last year.  The short answer is “NO.”  Neither federal law, nor the State Constitution, allows California to declare bankruptcy. 

However, with respect to local government, even though most states do not allow local bankruptcy, California has literally no regulations over local bankruptcy.  Assemblymember Tony Mendoza (D., Artesia) has introduced AB 155 to address the local problem.  AB 155 creates an oversight structure to provide pre-bankruptcy assistance to cities and counties, improve transparency for the community, and prevent unnecessary municipal bankruptcies caused by the City of Vallejo which was primarily undertaken as a way to void its M.O.U. with its police and fire unions.  The “oversight” function will be performed by the California Debt and Investment Advisory Commission, which was created by the Legislature to assist state and local agencies with the issuance, monitoring, and management of public debt and the investment of public funds.  This bipartisan committee possesses the expertise necessary to perform this important role, and it has representatives from local government to ensure fairness and balance.  This bill will NOT ban municipal bankruptcies or make them impossible.  Instead, it will simply create an oversight structure to ensure that bankruptcies are only entered into when necessary.

In the wake of the Vallejo bankruptcy and the deepening recession, many local agencies across California are now discussing bankruptcy as a possible option, particularly since the Governor’s Budget May Revise proposes to take nearly $3 billion in local government property tax dollars.  By retaining for municipalities the ultimate option of filing for bankruptcy protection, while protecting the state’s interest in oversight and the option to intervene to assist prior to municipal default and bankruptcy filing, AB 155 provides the state an opportunity to be able to discourage frivolous filings and preserve the process for those municipalities that truly are insolvent and face no other alternative to bankruptcy.

What Will Happen with the State Budget?

The Legislative Budget Conference Committee will begin meeting immediately to address the $21.3 billion deficit and most of the deficit will likely be closed by cuts.  The Governor will provide a detailed road map for his proposed cuts at the end of May, and legislative leadership wants to close budget revisions before the end of June.  At this point, public safety funding that had been moved from the General Fund into the Vehicle License Fee in the February Budget for two years is not on the “chopping block.”

However, quite frankly, everything may be on the “chopping block,” particularly since the feds won’t underwrite the state loans and if the Legislative Analyst estimates the budget deficit is actually closer to $25 billion is accurate.

The two major public safety concerns in the Governor’s May Revise are the impact taking of nearly $3 billion of local city/county property tax revenues pursuant to Proposition 1A, and the proposed release of prisoners from state prison back into the community to reduce prison costs.  We strongly oppose both budget proposals, both of which will directly or indirectly adversely affect public safety. 

Are Public Employee Pensions Going to be a Part of the Budget “Chopping Block?”

Everything will be part of the budget debate, and pensions are certainly an item for discussion.  The major concern will be either to suspend or postpone the employer’s contribution this budget year or to require that employees make up the employer’s contribution.  Changes in employee benefit programs are the properly a matter of collective bargaining, and we would oppose any unilateral legislatively imposed mandates on employees.

What Other Programs will be Affected by the Budget Cuts?

At this point, it is impossible to predict all the impacts the June Budget revisions may cause.  The Administrative Office of the Courts (AOC) has proposed a one day a month furlough on all courts, and the Los Angeles Superior Court has already implemented the proposal.  Other potential issues include “contracting out” or “civilianization” of public safety services, loss of some or all of the COPS, Juvenile Justice Camp funding, and other public safety programs, and employee cuts or furloughs.  At this point, my best suggestion is to “hope for the best but prepare for the worst.”  It’s going to be a rough ride for the next year or two.

Until next time, stay safe!

By Tim Yaryan, Legislative Counsel and Advocate 

As I write this column, I am looking at the latest FIELD POLL numbers which indicate that Propositions 1A through 1E are headed for defeat on the May 19th ballot. Only Proposition 1F, the measure to withhold pay increases when a budget is not passed, will pass and, likely, it will pass overwhelmingly.