California by the Numbers - What Exactly Happened this Year?
The situation in California is dire – we are not facing a budget problem. We are out of CASH. Those who understand finance know the difference. A Budget is a financial plan based on future estimates. Cash Flow is the amount of cash the state has on hand to pay obligations. The Controller has been shouting from the rooftop, has been ignored, but numbers don't lie. So, I have prepared a simple ''ducky-bunny'' analysis for you, because I know when you look at the numbers, the problem will be crystal clear to you, even if some running your government don't understand.
Looking Back - Cash Flow Analysis:
The State's fiscal year begins in July. If we compare year-to-year cash receipts for the 10 months ended July 1, 2008 through April 30, 2009, actual Cash Tax Receipts are down by 15% as noted below:
2008 - 10 mo. Actual: $79,072,175,000
2009 - 10 mo. Actual: $67,339,714,000
Difference -$11,732,461,000 or 15% decrease from 2008
However, cash is actually down by 17% from what the Legislature had projected last summer when the 2008-09 Budget was prepared:
2008-09 Budget Act projected: $80,942,672,000
The difference is $13,602,958,000 or 17% less than projected for 2008-09. However, our expenses remained at the projected levels. So, we operated in the negative this year as follows:
General Fund 10 mo. Actual 2009 Tax Receipts: $67,339,714,000
Money Transferred from Emergency Funds: $2,384,047,000
Minus Total Cash Expenditures: ($88,765,572,000)
How did we fill the gap? – We Borrowed
We borrowed internally from other funds: $15 Billion
We borrowed externally (October 2008 bond sale; $7B offering): $5.5 Billion
Looking Forward – What Do We Have Left?
As of April we had $4.7 B remaining to borrow internally from other funds. To keep it simple, let's use an average of the 10 month YTD total expenses and revenues to complete the 2 months remaining for this year ending June 30, 2009:
- Assume cash receipts of $6.7 B per month or $13.4 B by 6/30/09 FYE
- Assume bills to pay in the amount of roughly $8.8 B per month or $17.2 B by 6/30/09 FYE
My estimates are based on annualizing revenues and expenses using the 10 months ended 4-30-09. It should be noted that the usual cash available at this time of the year is more than $13B. Further more, the Projection from Controller's Office and Department of Finance shows $1 Billion Negative by July 31, 2009, reaching $24 B Negative by April 2010 if we continue to spend at the budgeted levels.
Cash Receipts: $13.4 B
Funds Avail to Borrow: $4.7 B
Total Potential Cash on hand: $18.2 B
Less: Obligations (Bills) to Pay: $17.2 B
Cash Remaining at June 30, 2009 FYE $1.0 B
Conclusion – We spent too much and we are broke!
We are out of CASH. Unfortunately, we must borrow to keep the state running as budget cuts (or reductions in spending) will not fill the hole immediately. Real cash reductions in spending would establish credibility with our lenders that we understand the gravity of the situation, and are taking serious measures to address the shortfall. Bankers or lenders will want to know that we will be able to repay our debt over time. We should reduce, at minimum, 15% of our Budget NOW as the delay in keeping higher expenses are cumulative. To do less will ensure that the cost of borrowing increases (assuming there are those who will buy our debt for a price), thereby extracting more of the State's revenues (your tax dollars) to pay for "gap funding" debt.