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State Treasurer, Controller, LAO and Finance Chiefs Warn of State Budget Catastrophe

By Jeff Hudson - December 12, 2008

The newly seated legislature got a lengthy description of the grim condition of California's finances, in an unusual session on Monday that featured presentations by Legislative Analyst Mac Taylor, Department of Finance Director Mike Genest, Controller John Chiang, and Treasurer Bill Lockyer speaking before a joint session of the Assembly and Senate.

Taylor repeated his findings in earlier reports that the state has "a $28 billion problem" in the form of a budget deficit, owing to "a precipitous decline" in the economy. Taylor added that experts are "projecting a slow recovery" which probably won't get underway until 2010.

Given the depth of the deficit and the likely length of the recession ahead, Taylor said, "the faster you act, the easier it will make your task. Spending cuts that go into effect sooner, and revenue increases that go into effect sooner" will do much more to solve the problem than actions taken some months down the road.

Genest said "the problem is severe, and the need for a solution is urgent." He said that if the Governor's package of proposed actions is approved in December, it would reduce the deficit by $9.2 billion. But if action is taken in February, the effect would be $7.2 billion, and if action is taken in June, $3 billion.v

Genest added that the state is rapidly exhausting its ability to borrow. "By March, you will have no borrowable resources left if we do not have a budget," he said.

And in a statement likely to send shivers down the spines of school district administrators, Genest said, "delaying action points the gun very directly at schools."

Genest added that "these numbers will get worse" as new numbers – even lower than previously projected – are received for the state's revenues for November. "I don't say that with relish, but I say it with great certainty," Genest said.

Chiang said that under normal circumstances, he would have been able to sell $7 billion in revenue anticipation notes this fall – but he was only able to find buyers for $5 billion. Potential buyers are worried about the state’s ability to pay its bills come spring, he said. The state could be forced to issue the equivalent of IOU’s for the second time since the Great Depression, he warned.

Chiang added that "addressing just this year's problem (will be) like burning the furniture to heat the house" and warned that the state faces "a financial catastrophe from which it could take years to recover." If the state can't pay its bills, and state-funded construction of schools, highways and other projects is stopped, "it will deepen and prolong the recession," Chiang said.

Lockyer said that "for the schools, there will be hundreds of programs that won't go forward, some $3.1 billion in school construction will lose funding all up and down the state," unless the budget problem is solved. He added that Prop. 98 funding "has not kept up with inflation," which will further complicate the funding of K-12 education.

With the poor market for state bonds, the state could be forced to stop spending on some projects for schools, highways, flood control and other things as early as next week, he said.

Lockyer also referred to the state budget approved last September as a "zombie budget" bearing "a poisoned apple that California gets to eat if we don't get an honest budget" this time around.

"Stop relying on the tooth fairy and other fantasies," Lockyer advised.

Noting that he served in the legislature during periods of recession in the 1970s, 1980s and 1990s, Lockyer said "this downturn is deeper" and added "it will probably be longer" as well.

New Assembly Speaker Karen Bass said that given the state's "financial meltdown, inaction will have catastrophic results."  Bass flew to the nation's capital at midweek to seek federal assistance for California.  New Senate President Pro Tem Darrell Steinberg said he agrees on the urgency and gravity of the problem.

Editor's Note: Jeff Hudson is the editor of EdBrief and an award-winning education reporter and writer in print, radio and television media.