SAN FRANCISCO - California faces a potentially expensive cash crisis if lawmakers don't approve a budget in a timely manner this year, state finance officials are warning.

The state will need to borrow billions of dollars for short-term cash flow management by September, and that will be much more expensive if a budget is not adopted on or close to the beginning of the 2009 fiscal year on July 1, H.D. Palmer, finance spokesman for Gov. Arnold Schwarzenegger, said yesterday.

Schwarzenegger unveiled his "May Revise" budget proposal for fiscal 2009 Wednesday, typically the event that commences serious budget negotiations.

The governor's new budget proposal - including plans to authorize up to $15 billion in bonds backed by future state lottery revenues - met with hostile responses from many lawmakers, which could foreshadow a difficult and protracted budget process.

Though Schwarzenegger's newest budget backed away from his earlier proposal to suspend the state constitution's minimum funding guaranty for K-12 education, public education advocates say more funding is needed to maintain current programs. His budget also would cut health and welfare programs.

"There are cuts in this budget proposal that unfairly hurt struggling California families and solutions that may be no more than risky schemes," said Assembly Speaker Karen Bass, D-Los Angeles.

Schwarzenegger's lottery plan would have to be approved by voters in November. As a backstop, the plan includes a temporary sales tax increase that would be triggered if the lottery bonds fail at the polls or are stalled by legal action.

The sales tax trigger is likely to be a sticking point with Republicans.

"With families struggling to pay high prices for gasoline and groceries while home values are falling, the last thing we ought to be doing is raising taxes," said the Assembly's Republican leader, Mike Villines of Fresno.

Budget delays are more rule than an exception in California, where a two-thirds vote in each house of the Legislature is needed to adopt a budget. Last year's budget was not signed until Aug. 24.

A similar delay would be very expensive for California this year, Palmer said.

Current Department of Finance projections for the state's cash requirements show that California would need to issue about $9 billion of revenue anticipation notes in September. The state usually issues a Ran deal annually.

But the state cannot issue Rans without a budget in place, Palmer said. And it takes about six weeks to put such a deal together.

"Walk back six weeks from September," Palmer said. Without a budget that is on or close to schedule, he addedc, the state won't be able to get Rans ready for market in time.

"In that case we would have to resort to selling a [revenue anticipation warrant], which would have two very negative consequences," Palmer said. "It would tee the state up for a likely downgrade to our credit rating. And we would have to pay for [market] access."

Raws are issued by the state Controller's Office and, unlike Rans, do not have to be repaid within the fiscal year they are issued. Rans are issued by the state Treasurer's Office.

The treasurer's ballpark estimate for the additional cost of issuing Raws, compared to Rans, is about $100 million, said Tom Dresslar, spokesman for Treasurer Bill Lockyer.

That is based on the state's historical experience in 2003, when the state last issued Raws in the face of a budget crisis. At that time, the state paid about $80 million in "credit enhancement premiums" on $11 billion in Raws, Dresslar said. It had to pay a further $60 million following subsequent downgrades of the state's bond ratings. The $100 million estimate does not factor in possible downgrades, he said.

The administration expects to complete an updated analysis of the state's cash position next week, Palmer said.

 

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