Davis Warns State of $400-Million Cash Shortage

Controller Gray Davis warned Tuesday that the state will be $400 million short of what it needs to pay bills due on June 30 and said the cash shortage will double the following day if no new budget is in place.

Davis again called on Gov. Pete Wilson to take action needed to allow the state to, in effect, establish a checking account with borrowed money so that bills can be paid in the normal course of business.

If no such fund is established, Davis said, he will have no choice but to issue registered warrants, or IOUs, as the fiscal year comes to a close at the end of June.

“California’s cash position is rapidly deteriorating,” Davis said through a spokesman. “My office is now forecasting a cash deficit of more than $400 million on June 30 and $815 million on July 1. Immediate action is necessary to restore confidence in California’s cash management.”

The warning from Davis came as two of the nation’s major credit-rating agencies cautioned that California’s rating was in jeopardy and could be downgraded again if the budget situation does not improve.

The warnings came from Fitch’s and Standard & Poors, which have already downgraded California’s bonds once since the recession began. A third agency, Moody’s, said it was monitoring California’s fiscal condition to see if the state could avoid outside borrowing at the end of the year.

State Treasurer Kathleen Brown echoed Davis’ warning and called on the governor and the Legislature to “act now or face a continuing worsening” of the state’s credit rating, which influences the interest rate the state pays on bonds.

The cash shortage Davis and others are warning of is not the same as budget deficits, which have become common in California in recent years. A budget deficit means the state is committed to expenditures that exceed its revenues. A cash shortage results when the deficit is so great that it cannot be covered by borrowing internally, from funds set aside by law for special purposes.