New California Budget Crisis May Torpedo November Tax Increase Initiative

State Controller John shocked California legislators this week when he sent a letter announcing that the State will run out of cash on March 8th without the legislature agreeing to allow the State Treasurer to delay $2.4 billion in payments to universities, counties and Medi-Cal, plus borrowing another $3.3 billion from Wall Street bankers.

The Controller’s announcement comes just two weeks after California Gov. Jerry Brown gave his State of the State speech to the Legislature, then immediately hit the road in a two-day campaign swing through Southern California to tout his November ballot initiative to raise taxes on all Californians. At a stop with 50 of Orange County’s top business leaders and CEOs, the Governor outlined how he was already making severe budget cuts, reorganizing state government, and implementing a 12-point pension reform plan.

Brown said he offered these actions as credibility before asking business to support his November tax initiative. The Governor added that he welcomed California’s future population growth and assured his audience that the State’s future is bright. Brown reiterated his support for the nation’s first high-speed rail system and for expeditious completion of the environmental review on a proposed project to fix the state’s water delivery system that has devastated Central California farmers.

California lawmakers had been assured by the Brown Administration’s Department of Finance that the State had sufficient cash reserves through the end of the State’s June 30th fiscal year. But Controller Chaing warned that for the first six months of the fiscal year state tax revenues came in at $2.6 billion below budget and spending came in at $2.6 billion over budget.

The Controller’s announcement came on the same day that the Assembly budget committee approved and sent to the floor legislation already approved by the State Senate that would supposedly fund the State until the end of the year by empowering the Treasurer to borrow $865 million from other segregated California Trust funds.

Controller Chaing warned that the State would be unable to make timely payments to vendors and other governmental agencies of at least $730 million beginning on March 8th and would be short billions of dollars more through at least April 13th. Furthermore, Chaing warned the State needed to restore at least a $2.5 billion reserve to handle the timing of large payments through the end of June.

Although the Sacramento Bee quoted Democratic Assemblyman Bob Blumenfield of Woodland Hills that the $5.4 billion shortfall was small relative to the $10 billion state leaders were prepared to borrow last year, Republicans questioned the ability of the state pay back the accounts. The Bee reported that Michael Cohen, chief deputy director of Brown’s Department of Finance, said the state would pay back special funds whenever programs need the money to operate. Cohen also said the state is spending more money than expected because courts have blocked some cuts, while some savings may come later in the fiscal year than forecasters predicted.

This new budget crisis comes at a very difficult time for the Governor after he travelled the state selling his tax initiative as necessary to prevent draconian funding cuts to popular K-12 schools. Early polling had indicated support was growing for the initiative. But if voters learn the November initiative if passed would only fund this year’s budget losses and still result in draconian cuts to schools, support for the tax increase may collapse.