One of the more complex issues in this year's delayed budget is just how big of a cash crunch the state will face as the stalemate drags on.
One thing all sides seem to agree on is the fact that the longer the standoff continues, the more likely it is that the state will run short on cash-on-hand to pay the bills.
But what does passing a budget have to do with cashflow coming into the state? Well, not much. But a signed budget allows the state to borrow money in the form of a "revenue anticipation note" -- called a RAN in budget lingo.
Those loans are relatively cheap and done every year to smooth out the the ups and downs of tax collections so the state can pay its bills each month.
But without a budget, California can't get a RAN.
Instead California would have to use a "revenue anticipation warrant," or a RAW.
David Crane, the governor's top economic adviser, explains the difference in a post on Fox and Hounds, with a bit of spin:
(I)f we run out of cash, we will be forced to access the Revenue Anticipation Warrant (RAW) market for that cash. To understand the nature of the RAW market, one must first understand its cousin, the Revenue Anticipation Note (RAN) market.
Because state revenues arrive in bulks but expenditures occur with more frequency, California regularly borrows money to bridge that gap. When a budget has been passed, for that money the state accesses the well-established and lower-cost RAN market for its cash flow needs. But when there is no budget and if the state needs cash, the state has to resort to the more expensive RAW market, and that market is neither well-established nor low-cost.
For example, when the state failed to preserve cash during the budget debate of 2003, Controller Steve Westly went to the RAW markets for $11 billion of short-term cash to cover expenditures made in the absence of a budget. To gain the desperately needed cash, the state not only had to pay steep fees and interest rates to Wall Street firms, but also was required to pay an additional $140 million for "credit enhancement" because note purchasers wouldn't buy the debt without a guarantee from someone other than California. Current Controller John Chiang made a good comparison when he recently described a RAW as "the equivalent of a subprime loan."
The governor's office is pressing the issue of passing a budget soon so the state doesn't have to dip into the RAW market, which could cost on the order of hundreds of millions of dollars.
It is the fear of the cost of a RAW loan, in part, that is driving the governor's office to temporarily slash state salaries to conserve cash. Crane explains further:
Because of the current crisis in the credit markets, the RAW markets are even more expensive to access than they were in 2003. That's why every dollar that we don't need to spend today should be reserved in order to avoid the need to finance that dollar later in the expensive and more uncertain RAW market.
And that's one of the justifications for the state worker pay executive order.
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