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California may be out of cash in Feb.

(Agencies)
Updated: 2008-12-06 14:21

SAN FRANCISCO – California is on track to run out of cash in February or March and faces a $15 billion cash shortage by the end of its fiscal year in June unless officials plug an $11.2 billion budget gap, according to the state's budget director.

In this Monday, Dec 1, 2008 file photo, California Gov. Arnold Schwarzenegger speaks at a news conference at his Los Angeles office. [Agencies]

Additionally, if Gov. Arnold Schwarzenegger and lawmakers fail to close the current fiscal year's budget shortfall soon, California, the most populous US state, may in March delay payments to its vendors or hand them notes promising payment, according to a December 1 letter to top lawmakers from the director of the Department of Finance, Michael Genest.

"Specifically, it now appears certain that available cash reserves from all sources will fall below the cash cushion target of $2.5 billion in February and that the state will begin delaying payments or paying in registered warrants in March," Genest said in his letter.

"To reduce this threat, the administration is also proposing legislation to increase internal borrowable cash resources," Genest added. "However, even with this cash solution the state will not be able to pay all of its bills in the absence of quick action on the budgetary solutions."

The last time California, the world's eighth biggest economy and the largest issuer of US public debt, issued payment promises to vendors was in the early 1990s.

"We're going to be very slim in February and absent any action we go into a negative cash balance in March and that means clearly we're not going to be able to pay all of our bills," said H.D. Palmer, Schwarzenegger's spokesman on state finances. "We need to take very real action to address the immediate crisis ... We're in extraordinary fiscal circumstances."

Legislative leaders were not immediately available for comment on Genest's letter, which came on the heels of Schwarzenegger calling lawmakers into a special session to close the budget shortfall.

The state's revenues have been weakening more than expected, reduced by a lengthy housing slump, sagging retail sales, turmoil in financial markets and rising unemployment.

Schwarzenegger, a Republican, is urging the Democrat-led legislature to back his plan for closing the budget shortfall with a combination of spending cuts and new revenues, including cash from raising the state's sales tax.

Democrats oppose spending cuts and the legislature's Republican minority opposes tax increases, resulting in routine stalemates on spending plans.

Those delays and budgets often tipping into deficit are major reasons why California's general obligation debt rating is paired with Louisiana's at the bottom of Wall Street's state rankings. Standard & Poor's and Fitch Ratings currently have 'A+' ratings on the debt, while Moody's Investors Service has an 'A1' rating on the bonds.

Investors are growing increasingly concerned about the state's finances. Spreads between California general obligation debt and the benchmark triple-A curve for 20- and 30-year maturities are at their highest level of the decade, topping even those when California's GO debt rating fell to 'BBB' in 2003, according to Muni Market Data, a service of Thomson Reuters.