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State fiscal analyst examines coming cash crunch

The state legislative analyst has released a new report about the state’s cash flow in anticipation of the state defaulting on some of its bills – perhaps as early as next month.

The new report was unveiled Wednesday by legislative analyst Mac Taylor at a Capitol press conference. He said the continued stalemate between Gov. Arnold Schwarzenegger and legislative leaders over a package of spending cuts and new revenues will lead to some tough choices.

“Absent prompt action by the Legislature to begin addressing the state’s massive budget and cash flow crises, the state’s cash cushion is likely to be depleted in the coming weeks, and the Controller will be forced to delay certain budgeted payments, including some vendor payments and tax refunds.”

The report clarifies that, despite some rhetoric to the contrary, the state will not “run out of money.” In fact, tax receipts flow in to state coffers through out the year. But what is likely is that the state will not have enough cash on hand to cover payments for all of its bills. And that means some state vendors will go without pay.

The question of who gets paid and who does not is, to some degree, already determined by state law. “In the weeks before the state’s cash on hand reaches zero, the State Controller … must delay payments classified as lower–priority under the law,” the report states.  “The Controller has broad discretion to determine which payments are “priority payments.”

Those priority payments “appear to include many related to schools, debt service, state employee payroll and benefits, and Medi–Cal.” Other payments, including tax refunds, student aid checks, and payments to local governments and vendors, may be delayed in the coming weeks.

Already last week, the state began freezing payments to transportation projects funded with state bond money. Those payments were frozen last month by the board of the Pooled Money Investment Board, a three-member panel that includes Treasurer Bill Lockyer and Controller John Chiang, both Democrats, and Mike Genest, director of Gov. Schwarzenegger’s finance department. Schwarzenegger urged the controller to issue the regular checks owed to transportation vendors – payments of about $33 million in all. But Chiang said the payments had already been ordered frozen.

The governor is expected to follow up with a formal appeal to the PMIB later this month.

The LAO report said though the prognosis is grim, California cannot file for bankruptcy protection. “States are believed to be ineligible for bankruptcy,” the report states.

The report included an urgent plea for swift action from Capitol leaders.

“Balancing the budget—by increasing state revenues and decreasing expenditures—is the most important way that the Legislature can shorten the duration and severity of the state’s cash flow crisis. Absent prompt action to begin addressing the state’s colossal budget gap and other measures discussed in this report specifically to help the state’s cash flows, state operations and payments will have to be delayed more and more over time.”

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