Controller Ups State Estimate for Borrowing

State Controller Steve Westly reaffirmed Friday that he plans to borrow the maximum amount allowable -- $9 billion to $11 billion -- to keep state government afloat as lawmakers struggle to solve the budget crisis.

He described it as the largest such borrowing in state history, but said even that won’t buy much time: If a budget is not passed by the end of summer, the state will run out of cash and be forced to give workers promises instead of paychecks.

California faces a gap between spending and revenue estimated at $35 billion between now and June 30, 2004.

“We cannot wait,” Westly said. “We need greater fiscal responsibility and we need to move quickly. We need a budget on time.”

Last year, before the budget crisis was in full bloom, lawmakers took until Sept. 1 to pass the budget.

Senate leader John Burton (D-San Francisco) said lawmakers are holding hearings to scrutinize state programs for cuts.

But “you don’t know what the true situation is,” he said, until state revenue is adjusted on the basis of tax receipts annually received in May.

Burton said establishment of a budget by the July 1 start of the new fiscal year “depends upon whether or not Republicans take a dose of reality and realize there’s a need for a tax increase.”

His Senate counterpart, minority leader Jim Brulte (R-Rancho Cucamonga), disagrees. He said experience shows that raising taxes during weak economic times only reduces the state’s revenue because people stop buying things that generate sales taxes.

Westly said he had hoped for cuts twice as deep as the $3.3 billion the Legislature pared and shifted from this year’s budget last month.

Another factor driving the heavy borrowing, he said, is the sudden uncertainty about more than $2 billion that lawmakers and the governor had counted on to help balance the budget.

California had expected to raise cash quickly by selling $2.3 billion in revenue bonds to be paid off through the state’s share of national tobacco settlement funds. The state planned to pay back the bonds over 25 years with money due under a 1998 deal in which tobacco companies agreed to pay $206 billion to settle 46 states’ claims over the public cost of treating sick smokers.

But payments from cigarette maker Philip Morris became uncertain last month after an adverse ruling by an Illinois court. The company warned that it might not have enough money to make its April 15 settlement payments to California and other states. As a result, state Treasurer Phil Angelides on Thursday put on indefinite hold the $2.3-billion revenue bond sale.

Until recently, the controller had estimated the need for short-term borrowing this spring at $4 billion to $11 billion.

“We are now quite clear that the amount we’ll need to borrow is between $9 billion and $11 billion,” Westly said.

And that debt could be more expensive than the state had expected: On Friday, the credit-grading company Moody’s Investors Service cut by one notch its rating on $9.5 billion of outstanding California notes that are scheduled to mature June 20.

Lower ratings mean a state’s debt is considered riskier. That often drives investors to demand higher interest rates on new borrowings. Even the $9 billion to $11 billion he plans to borrow would stretch only 30 to 60 days beyond July 1, Westly said.

With dwindling cash and no budget after July 1, the controller said, California would have to issue “warrants,” or promises to pay, to workers and contractors. He said payments would be ranked, with top priority going to schools, banks that have loaned the state money and federally mandated programs such as Medi-Cal.

The state’s revenues could be boosted by $4 billion a year if the state finance director triggered an increase in vehicle license fees. A 1998 law that lowered those fees provided that they would be raised when the state treasury lacked the funds to cover certain payments to local governments.

Westly said “common sense” seems to indicate that such a time is near. Such a car-tax boost would cost drivers an average of $136 a year.