Report Finds State Finances To Be in Dire Straits By July

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The State of California may be unable to pay its financial obligations as soon as July and might require federal assistance, according to a report issued Thursday by California's Legislative Analyst's Office.

The state may need to borrow an unprecedented $23 billion in short-term funds from private investors and enact major budget actions in order to meet costs, according to the report.

"The issue is, can those (funds) be dispersed, can (they) be spent on time and as scheduled?" said Cash Management Analyst Jason Dickerson, who prepared the report. "Payments will be subjected potentially to prolonged delays for much of next year."

Although the state uses short-term loans almost every year, the report warns that the loans can reach unprecedented levels this year.

Dickerson said part of the problem is that tax revenues for 2009-10 will be $8 billion less than the amount predicted in February.

The state currently expects to borrow $17 billion in short-term loans, but might need to borrow an additional $6 billion to pay its bills if propositions on the ballot for the May 19 special state election fail.

A May poll by the Public Policy Institute of California shows all six propositions on the ballot have been losing support since March and that propositions 1A through 1E currently lack the majority needed to pass.

"The state has to borrow from the short-term credit markets... to basically smooth out differences in the timing between revenue receipts and expenditures," Dickerson said.

California State Assembly Speaker Karen Bass said in a weekly address that because of the economic crisis, commercial banks may be unable to provide the needed loans and that assistance from the federal government may be needed.

"A cash crisis in which the state can't make its payments ... would be a devastating blow to the state's and the nation's economic recovery," Bass said in the address. "To avoid this kind of crisis, California needs the federal government to step in and provide the insurance that commercial banks cannot currently provide."

To meet costs, the legislature could mandate city governments to lend tax revenues to the state, according to City of Berkeley Spokesperson Mary Kay Clunies-Ross. Up to $3.8 million could be borrowed from Berkeley's General Fund in fiscal year 2010.

"The state could borrow (our property tax revenue) and they'd have to pay it back within three years with interest," Clunies-Ross said.

However, a proposition passed in 2004 requires that the governor declare a "fiscal necessity" before borrowing from cities and that two-thirds of the legislature approve the loan.

Amid diminishing state funding, the UC Board of Regents discussed the possibility of implementing furloughs and salary reductions if the state's situation worsens, according to UC Spokesperson Ricardo Vazquez.

In a Thursday press conference, UC President Mark Yudof said fee increases would be more likely if state support were to decrease further.

State funding per student for the UC system has dropped 40 percent since 1990, according to UC President Mark Yudof.

Regardless of state actions, Dickerson said bankruptcy is not considered an option for state governments.

"States are not generally thought to seek bankruptcy under the US Bankruptcy Code," he said. "The state never runs out of cash. Revenues come in every day. The issue ... is, will the state be able to pay its bills in time?"


Contact Tomer Ovadia at [email protected]

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