"What’s
the deal with Mel Gibson?" is probably the most common question being
asked by Californians.
But
in the six blocks surrounding the State Capitol, the most common question is,
"When will we have a budget?"
I’ll
leave the mysteries of Mel to the deep thinkers on ETV. But for the rest of
you, here are simple answers to your questions about when the state’s
budget will emerge.
When
will we have a budget?
A:
When the elected leadership and their constituencies are good and ready –
but not a day sooner.
When
will we know they are good and ready?
A:
When the state is unable to pay certain kinds of bills that the
leadership’s constituencies care about.
How
does that work?
A:
California is effectively insolvent. It is unable to pay all of its bills as
they come due. The state hasn’t "run out of money," because
it continues to collect taxes. But its cash flow is effectively negative and
like anyone in financial distress, it must start to prioritize payments and
manage its outstanding obligations. What makes the State of California
different from a struggling taxpayer is the amount of leverage it has over its
creditors. Also, it can’t declare bankruptcy, so this state of affairs
can continue indefinitely.
How
is California managing its obligations?
A:
The Controller has
said "the State’s General Fund continues to have a zero cash
balance." So its first line of defense is to borrow heavily – on
the order of $20 billion – from special funds like transportation and
other programs with dedicated fees or taxes. The second line of defense is to
start deferring payments due to local governments, like schools and cities and
counties. The State can save billions by stiffing other government agencies for
a couple months at a time.
Even
managing its money this way, can California still legally pay all its bills?
A:
Not all, but – amazingly – almost all, at least for the next couple
months. The State
Constitution says that "Money may be drawn from the Treasury only
through an appropriation made by law and upon a Controller’s duly drawn
warrant." Even though the State Budget is supposed to be the annual
vehicle for legislative appropriations, the Controller has
decided that he can legally pay most bills that are presented to him for
payment – if the cash is available. For example, the Controller paid 95
percent of the $21 billion in payments due in July and will plan to pay 87% of
the $17 billion in cash payments due in August.
He
can pay 95 percent of the bills without a budget? Why do we even need a budget,
then?
A:
Good question! Those unlucky few creditors to the state include private vendors
like the folks who sell vegetables to the prisons and veterans homes, financial
aid payments to college students, and some intergovernmental payments to
counties and community colleges. In other words, the state isn’t yet stiffing
the politically powerful.
So
why are the vast majority of bills being paid – without a budget?
A:
Court decisions and continuing appropriations. Most of the health and welfare
programs (that receive federal funds) must continue to provide services, even
without a legal state appropriation. The Corrections health program is in
federal receivership. The courts have also found that state employees must be
paid for their work, although the amount (full pay vs. minimum wage) is in
dispute. But many state-only programs are subject to "continuing
appropriations," which is a statute that says the money keeps flowing
whether or not there is a budget.
Will
we ever reach a critical point where VISIs (Very Important Special Interests)
won’t get paid?
A.
That’s the $19 billion question. The Controller has said recently
that the "latest
cash projections show the State’s cash will go into the red by the end of
October." To conserve cash to meet "payment obligations protected
by the California Constitution and federal law," he says he may begin
issuing IOUs this month or in September to conserve cash. While he did not
state who would be receiving those IOUs, bet on the state-only subventions
(though not to schools), tax refunds, and social services programs not under a
federal mandate.
One
other note: once a budget is approved, it still takes time to arrange a
borrowing instrument (revenue anticipation note) to accommodate the typical
cash flow ups-and-downs, so there is no guarantee that if the Legislature and
Governor go to the wire, that IOUs still would not need to be issued for a
while.
In
any case, the red letter day should occur in October, when the Controller must
decide which of the many political constituencies must go under the knife.