State Forced to Shift Funds as Debts Mount

California fiscal experts continued struggling with a treasury running dry Wednesday as they shifted funds to meet mounting debts and prepared to borrow $1 billion at premium interest rates as soon as the budget crisis is solved.

But the political stalemate that has left the state without a budget for 26 days continued, as Gov. George Deukmejian and legislative leaders met behind closed doors in an attempt to find a compromise.

Controller Gray Davis and Treasurer Thomas J. Hayes reported that in a search to squeeze every conceivable source for extra cash, they found a school construction cookie jar containing $217 million that could be loaned to the nearly empty treasury.

Davis indicated that together with existing resources the loan could be made available for meeting the end-of-month $500-million state labor force payroll or for other payments that courts may order.

Once the immediate crisis is past and a new budget is in place, Hayes said the emergency $1 billion loan will be necessary “in all likelihood” to quickly pay overdue bills and help replenish a battered treasury. A budget must be enacted before the state can either spend or borrow money.

Because funds will be needed very quickly once a budget is approved, Hayes told The Times he now has no choice but to issue taxable notes that carry signficiantly higher interest rates than the tax exempt instruments usually issued by the treasurer.

Saying he regretted the extra expense, Hays said that nonetheless “we are fully equippped and ready to do that.” He estimated the interest rate at 8% to 8.5% compared to 6% for the tax free fiscal instruments.

An assistant to Hayes, Russ Gould, said a single day’s interest on a $1 billion loan at 8.5% would total $236,000 compared with $166,000 a day at 6% interest.

Gould said, however, that the higher rate loan probably would be in effect for only a couple of days to cover the urgent payments from the treasury and that the loan then would be paid off and converted into a tax exempt note at 6%.

Even in the best of fiscal times, the state borrows money from outside lenders a month or so after the budget is enacted because revenue expenses rise and revenues fall during July. Routinely, the state issues tax exempt “revenue anticipation notes” at about 6% interest to fill the gap.

The emergency $1 billion loan this time, said Hayes and Davis, is made necessary by the extraordinarily long delay in enacting a state budget. Both said the usual revenue anticipation note loans of about $3.5 billion still will be made.

Hayes, just back from consultations on Wall Street, again warned Deukmejian and legislative leaders that further delay in enacting a state budget threatens to jeopardize the state’s platinum-plated credit rating and could cost taxpayers additional millions “next year and for years to come.”

In a letter, he told them that all three eastern financial houses that rate California bonds are “uneasy” about the long budget haitus and “the longer we delay, the higher the probablilty of an adverse action on their part.”

The three rating houses, Standard and Poors, Moodys and Fitch, have rated California’s credit at the highest level, or AAA. Any down grading of the rating, would add interest costs to the state’s borrowing.

Hayes called on the lawmakers and Deukmejian to enact a budget “as quickly as possible and demonstrate the fact that we continue to be fiscally responsible.”

Meanwhile, the fiscal squeeze for state agencies got a little tighter Wednesday when the Deukmejian’s Department of Finance warned that it is illegal for them to use departmental revolving funds to pay for operating expenses during the budget stalemate, according to a memorandum obtained by The Times.

Officials at several state departments said that the funds were their last resort to pay for travel, equipment and other day-to-day expenses.

The revolving funds were terminated by a terse internal memorandum issued by the Finance Department. “Budget analysts should contact their departments to remind them it is illegal to write (revolving fund) checks for current year expenditures during this time without a budget. We believe many agencies are continuing to illegally write (revolving fund) checks,” the memo said.

The Justice Department, for example, now has $200,000 left over in the fund, department spokeswoman said. The Department of Social Services has $1 million, which it was using for such expenses as sending inspectors to investigate complaints about community care facilities, employee training seminars, and salary advances, said spokeswoman Kathleen Norris.

The Department of Health Services had $4 million left over at the beginning of July. Now its fund is down to $800,000 after the department spent $410,000 on Monday to mail eligibility cards to thousands of Medi-Cal recipients.

“That was our last source of funds and with the latest interpretation of the law from Finance we can’t even spend that money,” said spokesman Norman S. Hartman. “Those people who travel frequently and expect to get reimbursed are not longer going to be able to do so.”

Times Staff Writer Max Boot contributed to this article.