Cash Management

Terminate the Budget Mess, Calif. Controller Warns

John Chiang warns Gov. Schwarzenegger and lawmakers of a "meltdown" that's just weeks away as the state — with its $41b deficit — burns through cash.
Sarah JohnsonDecember 23, 2008

All state controllers would have a tough job if they saw that a failure to balance the budget threatened to run the government out of its lifeblood: cash. But consider the plight of California’s John Chiang, who has had to pick a fiscal fight with Gov. Arnold Schwarzenegger.

That’s just about what he’s doing — using the harshest of words in his attempts to persuade the governor and state lawmakers to put aside their political differences and fix a devastating $41-billion deficit that, he warns, could well run California out of cash in less than 70 days if no remedy is installed.

Indeed, by March the state could be bleeding $1.9 billion, Chiang estimates in a letter the Democratic controller sent Monday to the Republican governor and state legislators yesterday.

Adopting a uniformly dark tone, Chiang pictures the nation’s largest state as in danger of running out of cash in just over two weeks, if the state’s politicians fail to put aside their differences and reduce the deficit.

“My office’s analyses indicate there will be no shelter from the storm as the state’s cash position will remain negative throughout the remainder of the fiscal year,” Chiang writes.

Moreover, the state’s problems go beyond being unable to pay basic bills, he declares. California — even with a one-time movie action hero as governor — risks being incapable of responding to natural disasters or crime. “Without action by the legislature and the governor, we literally are weeks away from a meltdown of state government,” Chiang ominously adds. A spokesman for the state controller’s office did not return’s request for further comment.

In the meantime, state officials are trying to preserve cash by halting 2,000 infrastructure projects and promising to layoff 250,000 state workers. And Chiang also is looking into deferring billions of dollars in payments by issuing IOUs, an action that is unlikely sustainable, he has predicted.

IOUs would “send the wrong message to our creditors by showing we cannot pay our bills,” he warned lawmakers two weeks ago. He has also asked his staff to issue a Revenue Anticipation Warrant, “a rarely used and extremely costly” way to borrow outside funds. However, he’s doubtful investors will line up to buy.

Chiang’s troubles as state controller escalated this year even before the credit crunch evolved into a crisis. The state’s revenues fell by $9.7 billion and it has had trouble getting outside borrowers to invest. Earlier this year, the state tried to sell $7 billion worth of short-term debt but was able to raise only $5 billion.

Chiang has butted heads with Schwarzenegger since he became controller two years ago over how to handle the state’s money issues. But in recent months Chiang has escalated his criticism of the state’s top politicians in an attempt to resolve the fiscal impasse. For instance, over the summer, Chiang promised to ignore Schwarzenegger’s executive order to downgrade the salaries of more than 200,000 state workers to minimum wage. Earlier this month, Chiang asked state lawmakers at a joint convention to pass a budget immediately. “Without coming together to address our budget problem, we will create a financial catastrophe from which it would take years to recover,” he said.

Schwarzenegger has been blaming the legislature for “continued failure to pass a real budget solution.” He has vowed to veto bills like the one presented recently by Democrats that would have raised $9.3 billion in taxes.