Budget woes could stop state operations

May 6, 2008 7:55:20 PM PDT
The prospect of the state actually shutting down some of its operations toward the end of summer is very real. The worsening budget crisis could take away many of the Governor's options when they don't pass a new budget on time.

"We're running out of cash."

Those haunting words came from the State Capitol on Tuesday are ringing throughout California. From state-funded daycare to all other programs that rely on Sacramento for money, state leaders are warning, the state could run out of cash as early as August.

"We need more cash in the state coffers in order to just pay our bills." says Assembly Speaker Fabian Nunez.

State accounts continue to dwindle because of the housing crisis and stock losses. Couple that with automatic spending growth, mandated by law, and it's a combination that could trigger a cash shortage.

"It's a major crunch, and it's not only because of the economy, but it's because we have a budget system that has really failed the state for the last few decades," says Gov. Arnold Schwarzenegger.

During cash crunches, the state often turns to Wall Street for short-term loans or moved money around the budget, robbing Peter to pay Paul. Borrowing, though, is tricky this time. In order to get favorable interest rates, the state has to enact a timely budget, which hasn't been done in years.

The other option is take out the equivalent of a sub-prime loan, which has extremely high interest rates and a $100 million fee. It could also lower California's credit rating, already one of the lowest among state governments.

One state-funded daycare is already thinking about the cash crunch. Its best hope is an on-time budget, but it's bracing for something much worse - another cut in funding.

"We put on hold any pay increases for the staff. Any kind of stipends they may receive, they're not going to get. No raises," says daycare provider Bonnie Kurtz.

During the 2003 budget crisis, the state chose the sub prime route, leaving Californians to repay the loan with interest, but also an $84 million fee.


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