California still doesn’t have a budget for the current fiscal year, which commenced on July 1. Without a budget now for nearly a month, California faces additional pressure to conserve cash. The following explains why.
Though often (and perhaps conveniently) forgotten, as a general rule our state Constitution prohibits expenditures in the absence of a budget. Because of that limitation, a great deal of spending – for childcare centers, health care providers, centers for the developmentally disabled, many county services, contractors, and more — was already suspended as of July 1.
However, notwithstanding that general rule, the Constitution as well as federal law and public safety require some spending whether or not there’s a budget. Examples of such mandated or essential service spending include certain funds for public schools, debt service, child welfare programs, public safety, disaster relief and more. Those activities require cash and therefore the state must always have ready access to cash sufficient to meet those essential or mandated requirements.
Moreover, if we run out of cash, we will be forced to access the Revenue Anticipation Warrant (RAW) market for that cash. To understand the nature of the RAW market, one must first understand its cousin, the Revenue Anticipation Note (RAN) market.
Because state revenues arrive in bulks but expenditures occur with more frequency, California regularly borrows money to bridge that gap. When a budget has been passed, for that money the state accesses the well-established and lower-cost RAN market for its cash flow needs. But when there is no budget and if the state needs cash, the state has to resort to the more expensive RAW market, and that market is neither well-established nor low-cost.
For example, when the state failed to preserve cash during the budget debate of 2003, Controller Steve Westly went to the RAW markets for $11 billion of short-term cash to cover expenditures made in the absence of a budget. To gain the desperately-needed cash, the state not only had to pay steep fees and interest rates to Wall Street firms, but also was required to pay an additional $140 million for “credit enhancement” because note purchasers wouldn’t buy the debt without a guarantee from someone other than California. Current Controller John Chiang made a good comparison when he recently described a RAW as “the equivalent of a subprime loan.”
And now, because of the current crisis in the credit markets, the RAW markets are even more expensive to access than they were in 2003. That’s why every dollar that we don’t need to spend today should be reserved in order to avoid the need to finance that dollar later in the expensive and more uncertain RAW market.
Think of it this way: A dollar devoted today to a non-essential expenditure is a dollar that in a month or two could be used for essential public safety. If we’re out of cash at that point, we would be required to access the RAW market, hopefully get a positive response in an uncertain market, and if successful, pay a high cost on that dollar in fees and interest.
Accordingly, until the Legislature sends a responsible budget to the Governor for his signature, it’s simply prudent to conserve as much cash as possible now in order to be able to meet essential and mandated requirements.
Today, the Governor invoked his executive authority to take additional steps to make sure California has enough cash to cover its essential and mandated costs and be prepared for an emergency. He has given a great deal of consideration to these matters and carefully weighed the state’s options. This isn’t something he takes lightly – he considers it his duty as the state’s chief executive to make sure this state can meet its obligations.
Given the uncertain timing of a budget, an unprecedented and ongoing wildfire season, the need for the state to be prepared for unforeseen emergencies, and the extraordinarily high cost of a RAW financing, the Governor is showing fiscal responsibility and executive leadership by taking all responsible steps to conserve cash now.