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California Debt Woes Set to Shoot Higher

SAN FRANCISCO - California's short-term borrowing requirements this summer will be billions of dollars larger than the mammoth numbers officials were already projecting, according to a report last week from the state Legislative Analyst's Office.

State finance officials have been talking about a cash-flow borrowing of up to $13 billion this summer.

But absent any changes to state revenue and spending plans, California's government will need at least $17 billion, and up to $23 billion if public opinion polls are correct and voters next week reject a series of budget-related ballot measures in a May 19 special election, the LAO report said.

"Given the current state of the credit markets and the state of California's own credit standing, the state of California will have difficulty borrowing that amount," said Jason Dickerson, fiscal and policy analyst for the office and author of the report.

Without the massive borrowing or a major legislative budget correction, "the state will not be able to pay many of its bills on time for much of its 2009‑10 fiscal year," his report said.

State Controller John Chiang made a similar point Friday in releasing his cash balance report for April. Through the first 10 months of the fiscal year, revenue is $2.1 billion below budget estimates.

"Beginning this summer, we face a cash problem unseen in nearly eight decades, and the magnitude of that problem grows with every projected revenue dollar that fails to appear," Chiang said in a statement. "The state's last shortage and the resulting payment delays in February hurt California taxpayers, businesses, local governments and public works projects - and yet the crisis looming could be at least three times as bad."

The coming troubles will be the result of the state having a much weaker than usual cash position when the fiscal year ends June 30. That is problematic because of the structure of California's cash flows over the course of a fiscal year - it disburses the bulk of its general fund expenditures during the first half of the fiscal year, but collects most of its receipts later.

Under its current budget, the state would run monthly cash-flow deficits every month between July and November, the LAO reported.

Lawmakers in February attempted to plug the $40 billion budget gap with a package of tax hikes, spending cuts, and payment deferrals. As part of that compromise, they called next week's special election with six budget-related ballot measures, including three that directly impact the general fund's cash position in fiscal 2010.

Those measures have trailed in every published opinion survey, including the most recent one, released Thursday by the Public Policy Institute of California.

The question faring the worst, with 58% surveyed saying they will vote no, is the measure that would authorize $5 billion of bonds backed by the state lottery - a key component of the budget.

"Proposition 1C is the measure that matters most for next year's budget, and it's in the most trouble," survey director Mark Baldassare said in a news release.

Failure of the ballot measures would push the state's cash-flow borrowing needs to $23 billion from $17 billion, Dickerson's LAO report said.

State officials, including Treasurer Bill Lockyer, have been lobbying Congress and the Obama administration for some sort of federal backstop.

The LAO said it is prudent to seek federal support, but warned lawmakers that it could come with strings attached that they won't like.

The report recommends lawmakers take prompt action, including balancing the budget through revenue increases and-or spending cuts, and taking new actions to delay or defer scheduled payments to schools, local governments, service providers, and others.

The goal, according to the report, should be to limit the size of the cash borrowing to "somewhere below $10 billion."

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