California LAO outlines cash-management tools for state government

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The California Legislative Analyst's Office wants state lawmakers to be armed with knowledge about the opportunities and limits of state cash management strategies.

With that in mind, the LAO outlined in a Tuesday report what it called “recent and novel actions” to borrow from the state’s cash resources while offering policymakers a framework to evaluate any future borrowing of this nature.


The LAO noted that while the state has faced significant cash problems in the past, its cash position is currently very good and at the end of 2019-20, the State Controller's Office estimates the state will have $54 billion in internal borrowable sources available.

Today, the state has such a healthy balance sheet that it has been able to commit a small part of its liquidity pool to making loans to itself to fund areas it considers priorities.

The LAO used as examples loans made by the Legislature including Senate Bill 84 in 2017, which reduced the state’s long-term pension debt by transferring $6 billion from the Surplus Money Investment Fund to the General Fund as a one-time cash loan to supplement the state’s employer contributions to the California Public Employees' Retirement System. The other Assembly Bill 1054 authorized the state’s Director of Finance to issue a loan of up to $10.5 billion to establish a $21 billion wildfire fund to provide a financial buffer to the state’s investor-owned utilities. The state’s fiscal 2020 budget authorized an initial loan of $2 billion to establish the fund.

The LAO advised that lawmakers consider several factors before making such loans including the size of the loan, duration, dependability of repayments and the fiscal benefit using rigorous qualitative analysis. Each of the two recently made loans meet some of the criteria, according to the LAO.

For instance, SB 84 has a long duration with loan repayment required by 2030, but it is not very large. It also carries a significant fiscal benefit and has a dedicated stream of repayments. Though AB 1054 has the potential to be much larger, it’s also likely to have relatively short duration, because it would be taken out by bonds issued by the California Department of Water Resources within a year. The bonds would be repaid by extending a utility bill surcharge used to back bonds during the state’s energy crisis.

The LAO advised, however, that lawmakers be very cautious about approving any future proposals to make additional loans from the state’s cash resources.

The state's positive cash position will not last forever.

When a recession occurs, the LAO wrote, “it will mean lower revenue receipts, larger cash deficits, and declining balances of internal borrowable resources.’’

“Over its history, the state has faced three key periods of prolonged cash difficulties: following the recession in the early 1990s, after the dot-com bust in the early 2000s, and most notably, throughout the Great Recession of the late 2000s,” according to the LAO report. “During each of these periods, and particularly during the Great Recession, the controller and Legislature both needed to take extraordinary actions to ensure the General Fund could pay its bills.”

Among those extraordinary measures was delaying billions of dollars in payments and the controller issuing billions of dollars in IOUs. Prior to that, then Gov. Arnold Schwarzenegger had written a letter to the U.S. Secretary of the Treasury saying the state might need to borrow money as the state could not borrow from the credit markets, which had frozen after Lehman Brothers collapsed. The state did not end up borrowing from the federal government.

The report also described different moments in history when the state was facing a cash crunch and what tool was created to deal with the problem.

The state’s ability to issue registered warrants or IOUs, which the state tapped during the Great Recession, was created in 1933 during the Great Depression when the state feared the general fund would be depleted before the end of the 1933-35 biennium. It gives lawmakers the ability to issue registered warrants that bear interest at 5% annually. The state created the ability to issue revenue anticipation notes in the early 1970s at a time when the state faced cash deficits. But after decades of issuing RANs nearly every year, the LAO wrote, the state has not issued one since 2014.

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State and local finance State budgets State of California California
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