SACRAMENTO — The inability of California legislators to put together a fiscal recovery deal has the potential to cause major financial problems for the state.
Over the next few months, lawmakers must act quickly to find ways to keep from running out of cash in June -- when the state must repay $14 billion in short-term loans taken out to keep the state solvent last summer. Without a large bond, such as the $15-billion long-term borrowing proposed by Gov. Arnold Schwarzenegger, the state won't have money to make those payments.
State Controller Steve Westly said California faces a liquidity crisis if action is not taken soon. "Unless we get a bipartisan solution, we are going to have a cash shortfall in June," he said.
Many budget experts in Sacramento and elsewhere agree that trying to pay back the loans due in June without a large, long-term bond is close to impossible at this point. The state simply wouldn't have enough cash on hand, even if it enacted massive cuts in programs and services.
One option would be for lawmakers and Schwarzenegger to agree on raising taxes. But that is unlikely because the governor has said repeatedly that he would not support a tax increase.
"If you are not going to raise taxes, you really have to go with a longer-term plan that spreads out the problem," said John Hallacy, managing director of municipal research at Merrill Lynch in New York City. "Cutting the budget on the order or magnitude we are talking about is pretty impractical."
The reason for that is the state already faces a shortfall of as much as $14 billion in the 2004-05 budget year. Somehow, Schwarzenegger will have to propose ways to close that additional gap when he presents the year's budget in January.
The June deadline to pay back last summer's loans is the reason Schwarzenegger sought to put his bond proposal on the March ballot. Unless the governor calls a costly special election, the next opportunity to bring a borrowing plan before voters would be November.
By then, the state could find itself in a cash crisis in which any new revenue that comes in must be diverted directly to the banks that hold the state's debt, forcing some basic government services to halt.
Schwarzenegger could try to move forward with a $10.7-billion borrowing plan that was approved in this year's budget but faces a challenge in court. The governor abandoned that borrowing in favor of his $15-billion ballot measure because it had not been authorized by voters.
