The Legislature's budget analyst, Mac Taylor, says that schools, colleges and bondholders will have first call on the state's money if its cash flow crisis hits home in a few weeks.
But Taylor says in a report on the looming cash flow crisis that even if the Legislature fails to reach agreement on closing the state's budget deficit, the cash crisis could be relieved with some emergency legislation to allow more internal borrowing of restricted funds.
Gov. Arnold Schwarzenegger and legislative leaders have been conducting closed-door negotiations this week on both the budget and the cash crisis, which are related but separate issues. Controller John Chiang has said that the state will be forced to curtail state disbursements sometime in February unless there's rapid action on the budget and/or cash flow-related legislation.
The administration has asked the Legislature to approve measures that would free up about $2 billion in restricted funds that could be borrowed by the state general fund and thus stave off the cash crunch. It's also said that rapid action on the budget would allow the state to defer more than $1 billion in payments to schools that otherwise would have to be made.
Taylor cautioned that the state has never faced a cash crisis like the one now looming. He said the state, in documents it produced when seeking private cash flow loans, has pledged that schools and colleges and bondholders would have first call on any available dollars if the state can't pay all its bills.
State officials have said that making bond payments to preserve the state's standing in the credit markets is a top priority.
After schools and bondholders, others in line for any available cash would be repayments to special funds for internal borrowing, state employees' payroll, claims for medical services to the poor, payments on lease-purchase bonds commonly used to build prisons and "any amounts required to be paid by the courts."
"Determining which state payments fall into these broad categories is a challenging task," Taylor said in his report, adding that various interests seeking pieces of the reduced cash may seek judicial intervention.
Controller Chiang is the one who will be making those decisions, as well as deciding whether "registered warrants," a form of IOUs, would be issued in some cases, allowing their recipients to negotiate with banks over whether to accept them in lieu of cash payments. And, as Taylor notes, the "controller can also simply not pay some bills."
Even if the state can't pay its bills, "bankruptycy protection is not an option," Taylor says, because while local governments - such as the City of Vallejo - have the right to file for bankruptcy, the federal bankruptcy law "it is generally believed does not afford states an ability to file for bankruptcy protection."
The Legislative Analyst's Office has posted the full report here.
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