Politics

California Averts Cash Crisis – For Now

SACRAMENTO (AP) ― Gov. Arnold Schwarzenegger declared California's brisk sale of short-term notes as "a vote of confidence" that will help the state avoid a cash crisis at the end of the month.

Sales were going so well that the state Treasurer's Office decided Wednesday to increase the state's offering to $4.5 billion from $4 billion, as investors willingly picked up government notes in an uncertain financial market. As of late Wednesday, individual orders totaled about $3.9 billion and the state will offer the notes to institutional investors Thursday.

"These are good, safe investments that will help protect vital services in California and I'm thrilled to see so many people have taken advantage of this valuable investment," Schwarzenegger said in a statement.

California is offering to pay lenders back with interest next year so it can raise enough cash now to pay for operating expenses until taxes come in the spring. Without the sale, the state would have run out of cash at the end of this month.

The state will have to conduct a second round of borrowing soon. The state needs a total of $7 billion to pay for operating expenses until tax revenues come in the spring.

While it looks like California will be able to borrow enough cash to get through the new year, the governor and lawmakers still haven't addressed the state's bad habit of spending more money than it generates in taxes each year. The state is projected to spend about $6 billion more than it takes in next fiscal year.

Budget analysts are especially concerned that Wall Street's wild fluctuations and the state's high unemployment rate of 7.7 percent will result in even less revenues, putting the state into further strain.

On Wednesday, California's latest revenue figures showed it was down $1 billion below projections for the first quarter of the 2008-09 fiscal year, which fell in line with earlier forecasts that the state will be off the mark by over $4 billion for the year.

"One of the ongoing concerns is the state's structural deficit. They've had one for years," said David Hitchcock, a senior director at Standard & Poor's credit rating agency, which assigned a negative watch to the state's bonds last week. He said the state's current plan to borrow against future lottery revenues would only provide short-term relief.

In recent weeks, Schwarzenegger and legislative leaders have been focused on getting through the short-term cash crisis. The governor warned that the state will run out of cash at end of the month because the frozen credit market could prevent the state from accessing routine borrowing.

Schwarzenegger at one point sent a letter to U.S. Treasury Secretary Henry Paulson asking the federal government to assist California should it not be able to secure loans.

While the market remains volatile, the outlook for borrowing began to change after the federal government approved a $700 billion Wall Street bailout and lowered interest rates. When state Treasurer BillCalifornia earners paid 48 percent of the state's income taxes, much of that in the form of capital gains. In boom times, the system has a tendency to inflate state revenues, such as during the height of the tech bubble in 2000.

"You wouldn't expect a state with 37 million people would be affected by a few individuals but there is some sensitivity there," Hitchcock said.

The Schwarzenegger administration has lowered personal income tax collections by $1.5 billion, sales tax by $1 billion and corporate tax by $1 billion for the 2008-09 fiscal year. Combined with other adjustments, the state projected a total downward adjustment of $4.3 billion.

Schwarzenegger and lawmakers hope to fill some of that shortfall by borrowing $10 billion from future lottery revenues over the next two budget cycles. However, analysts said the other states that securitize their lottery—Florida, West Virginia and Oregon—use proceeds for brick and mortar projects, not deficit financing.

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