Thursday, July 24, 2008
It’s nut-cutting time in Sacramento, to paraphrase famed wordsmith Dick Nixon, as California politicians face an August 1 deadline, when further dithering over the stalemated state budget will start having real-world financial consequences. The top four party leaders of the Legislature assembled in Governor Terminator’s office this week, perhaps to begin at last serious negotiations over the $144 billion budget. As they did, the pending date hung over the Capitol like a looming toxic cloud, threatening to rain nasty political and fiscal consequences down on its inhabitants.
Ever since the governor and Legislature blew off the constitutional mandate of June 15 for the fiscal year that began July 1, everyone in town has known that the bill for the annual ape dance over the budget would come due come August. The reason is simple: California’s government is expected to run out of cash in September. Even in the best of times, arranging what amounts to a bridge loan of about $10 billion just to pay routine bills requires four to six weeks of legal notices, financial maneuvers, and jawbone negotiations in the credit markets. And as anyone who’s been even occasionally awake of late well knows, these are not the best of times.
If Treasurer Bill Lockyer must find the money without a state budget in place, the difference in the amount California taxpayers fork out for a loan will be substantial: Estimates range upward from $150 million, over and above interest, to borrow cash-flow financing of $10 billion.
“Time is literally money — and a lot of it,” said H.D. Palmer, deputy director for external affairs at the state Department of Finance.
Jargon alert: If a budget has been approved when the process of scoring the $10 billion begins in early August, California can borrow the money with financial instruments called Revenue Anticipation Notes (RANs); without a budget, the state will need more costly Revenue Anticipation Warrants (RAWs). The differences between RANs and RAWs go well beyond a single consonant.
Start with the bottom line: RAWs will cost Californians a hefty “credit enhancement fee” beyond whatever interest the state pays for its money. With credit markets in a near-chaotic state, no one knows how much that might be. By comparison, when the credit waters were placid back in 2003 (the year of the budget fight that drove Gray Davis from office), $11 billion in RAWs cost taxpayers an extra $140 million. Given the current Wreck of the Hesperus churned up by the subprime mortgage mess, that could be a bargain.
“There are a lot better uses for that money at a time when we’re already forced to make deep and difficult cuts in many state programs, than paying additional borrowing costs,” said Palmer, in a breathtaking understatement.
Using RAWs would also likely trigger yet another markdown in California’s credit rating, already among the nation’s worst (sure we’re lower than Mississippi, but we tied Louisiana!). And yet another extended budget crisis would ripple through the state’s economy, which, the Center for the Continuing Study of the California Economy reported this week, “is in a recession.”
As a political matter, none of this is lost on budget negotiators: “I’m confident at this point there will be a budget put up for a vote before the first of August,” conservative Republican senate leader Dave Cogdill told reporters, the Sacramento Bee reported, a view echoed by liberal Democrat Assembly Speaker Karen Bass, among others.
The key question, of course, is whether such a vote yields the two-thirds support in each house needed to pass. Democrats are standing firm on their plan, which includes $8 billion in new taxes, while GOP leaders want deeper cuts and insist they will not support any new taxes. The governor, meanwhile, keeps flogging his proposal to sell off shares of the lottery, a strategy that so far has had as much effect as publishing poetry.
The next seven to 10 days will be telling. With all 80 Assembly seats and half of the senate’s 40 on the November ballot, early passage of a budget would allow the candidates to get busy with full-throated political recriminations and finger-pointing. If it doesn’t happen, the best political incentive for a compromise plan will have been lost.
(Still need a rooting interest in the state budget mess? Enter the Capitol Letters Blog Budget Pool and win big prizes! Send your best guess of the exact date and time when the governor will sign a new budget to jerry@independent.com.)
Check out the Capitol Letters blog at independent.com/capitol-letters. The views expressed in this article are solely that of the author and not of his employer, UCSB.