Franchiseblade, You Gonna Get Paid? [Cali budget crisis]

http://www.mercurynews.com/opinion/ci_10613497


Dan Walters: Wall Street crisis threatens California's house-of-cards budget plans
By Dan Walters


Sacramento Bee

Article Launched: 10/01/2008 08:45:32 PM PDT


There are uncanny parallels between the political dynamics of California's budget stalemate and those of the Washington impasse over a $700 billion banking industry bailout — and also a more direct financial connection.

California must borrow as much as $10 billion this month to finance the budget that state legislators and Gov. Arnold Schwarzenegger finally enacted last week, and because of the months-long delay and the banking industry crisis, that money could be difficult to obtain.

Had the budget passed even a week or two earlier, state officials say, they would have had little difficulty finding buyers of so-called "revenue anticipation notes," which the state uses almost every year to provide liquidity while awaiting the big surges of income, sales and corporate taxes later in the fiscal year.

But now that there is a budget, the financial industry is in virtual lockdown mode, awaiting congressional approval — if there is congressional approval — of the bailout scheme.

The major Wall Street banking houses that would ordinarily snap up California paper are in turmoil, and state officials worry that they wouldn't make loans of the size California needs until the situation stabilizes.

Time is the state's financial enemy. With a budget in place, the state is cranking up check-writing machines to catch up on payments to local governments, schools, health care providers and others, which means the state's



cash reserves are melting away quickly.

No one knows for certain when the state's treasury will be depleted, but it will be sometime around the end of October, which means the state's three financial authorities — the Department of Finance, state Treasurer Bill Lockyer and Controller John Chiang — must decide very soon how much to seek, and solicit proposals from lenders.

Even if financial markets stabilize somewhat, it's evident that lenders will impose much tougher standards and conditions than they have in the past. The state's credit rating, which is already very low, then becomes an issue.

The revenue anticipation notes would have to be repaid by June 30, 2009, and the new state budget is precariously "balanced" with a flock of one-time revenues and accounting gimmicks; it's a house of cards that could collapse if, for instance, the economy continues to deteriorate — perhaps due to the banking crisis — and revenues dip significantly below expectations.

This is not a theoretical problem. In 2004, the state had outstanding revenue anticipation notes that it could not repay, forcing newly inaugurated Schwarzenegger to ask voters for an emergency $15 billion bond issue to retire the notes and stretch out repayment.

Finally, the man who bears the primary responsibility of persuading bankers that the state is a good risk is Lockyer, who has denounced the budget provisions as "fiscal folly" that fail to adequately address the state's chronic deficit.

Stay tuned for later developments; this could be very, very interesting.



Dan Walters is a columnist for the Sacramento Bee.