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San Francisco Chronicle: California running out of money again

Harris Kenny
February 1, 2012, 6:52pm

Update: John Gramlich of Stateline (a project of The Pew Center on the States) reports that California lawmakers are already hungrily eying the potential revenue windfall from Facebook's $5 billion initial public offering (IPO) this week. According to Gramlich, Facebook's IPO could generate as much as $1 billion in direct new revenue. While this good news may be encouraging to a state weary with bad news, it won't meaningfully solve any problems. Decades-long fiscal mismanagement can't be solved in one fell swoop.

Wyatt Buchanan of the San Francisco Chronicle reports:

California will run out of cash by March 1 if the Legislature does not take immediate action, Controller John Chiang told budget leaders at the Capitol in a letter Tuesday.

The controller recommends borrowing and delaying some payments to deal with the shortfall, which he projects will last seven weeks. Absent that kind of action, which lawmakers and the administration of Gov. Jerry Brown say is assured, the state would probably have to send IOUs and delay tax returns.

"Although this cash-management plan relies on still more borrowing, payment delays and deferrals, we believe this is the most prudent and responsible course of action considering we have about four weeks before the advent of a cash shortfall," Chiang wrote in a letter to the chairmen of the Assembly and Senate budget committees.

He called the plan to borrow and put off some bills the "ideal way" to avoid IOUs and tax-refund delays.

Anyone familiar with California policy shouldn't be surprised by today’s news since California’s fiscal situation can be described as nothing short of a nightmare. Buchanan continues:

The controller said the overarching problem is that, as of the end of the calendar year, the state was spending $2.6 billion more than was included in the budget while tax revenue coming into state coffers was $2.6 billion below projections.

He said $3.3 billion must somehow be found if the state is going to bridge the seven-week cash shortfall period, but the situation could get worse if there is more overspending and further reductions in tax income…

Chiang said the state will fall below a $2.5 billion "cushion" of cash on hand on Feb. 29, and the next day it would be in the red. The problem would grow to a $730 million deficit by March 8, and the overall cash shortfall would last until sometime around April 13, he said.

Not everyone is deterred by Chiang’s warnings. State Sen. Mark Leno (D-San Francisco), who is chairman of the Senate Committee on Budget and Fiscal Review, told Buchanan, “(the projected shortfall is) a very short-term cash-management situation. All budgets are, by nature, an educated guess.” This is news to California’s millions of families and businesses who know the state expects them to pay their bills on time.

Fortunately there are many reforms that California policymakers can pursue when they decide to get the state's fiscal house in order. Below are links to some recent Reason Foundation research on this subject:

>> Jerry Brown Continues to Push High-Speed Rail Boondoggle while California Drowns in Debt by Adam Summers

>> California’s Employment Dysfunction by Harris Kenny

>> California, Illinois Continue to Make Other States Look Good by Harris Kenny

>> California's High-Speed Rail Fibs by Adrian Moore

>> The Detailed Concerns of the CA HSR Peer Review Group by Adrian Moore

>> Jerry Brown's Budget Proposal Gets Plenty of Reaction by Adrian Moore

For more, see Reason Foundation's California Research Archive here.


Harris Kenny is Policy Analyst


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