LAO: Crisis to Worsen

The California Legislative Analyst’s Office this week said the state’s cash crisis is deepening.

The state will have $500 million more in bills than income in February and that number will swell to $4 billion in March, the nonpartisan LAO said this week.

At that point, the state will continue to make priority payments like school aid and debt service payments, but it will have to delay other payments, incurring interest charges and late fees, the LAO said.

“Some action has to be taken,” said deputy legislative analyst Michael Cohen in a press conference Wednesday. “You get into a situation where you’re just adding more and more costs to our state budget problem the longer that our cash crisis goes on.”

Lawmakers have been deadlocked since November over solutions to the two-year, $40 billion budget gap. Absent changes to their approved fiscal 2008-2009 budget, the state will spend almost $15 billion more than it receives in the current fiscal year, which ends June 30. The total general fund budget is $103.4 billion this year.

Republicans in the Legislature want to close the entire gap with spending cuts, while GOP Gov. Arnold Schwarzenegger and Democratic lawmakers support tax hikes to close part of the gap. The state’s constitution requires a two-thirds majority for tax increases or budget bills, forcing the two parties to agree on any solution.

While the LAO recommended several technical changes to the state’s cash management policies — including allowing greater borrowing of internal funds to meet cash needs and delaying some payments — its report said California shouldn’t look to the muni market for more funds until it has a balanced budget.

“At this stage, given continuing trouble in the national credit markets, along with the state’s tenuous financial situation, there’s not much hope of being able to get external cash-flow borrowing,” Cohen said.

California tried to sell $7 billion of revenue anticipation notes in October, but it was able to sell just $5 billion. Since then, Standard & Poor’s has lowered its short-term rating to SP-2 from SP-1 and put the state’s long-term debt on negative watch.

State Controller John Chiang has repeatedly warned lawmakers that he’ll soon have to begin issuing IOUs — or so-called registered warrants — to pay state bills if they don’t close the budget gap.

“The single most important thing the governor and the Legislature can do to help our cash position is to balance our budget,” Cohen said.

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