California faces its worst fiscal crisis in decades. The state's general obligation bonds, rated triple-A a year ago, now stand at double-A and could decline further this summer unless state leaders quickly agree on a new budget.
A lingering recessionand the loss of more than 600,000 jobs have battered state tax revenues. Current estimates show a comnined budget deficit of at least $8 billion for the current fiscal year and the one ending on June 30, 1993.
The state also faces a cash crunch. Accordingly, it plans to sell $400 million of reimbursement or revenue anticipation warrants next week.
Market participants are also monitoring whether the governor and Legislature can agree on a fiscal 1993 budget by July 1, the constitutional deadline. A delay could mean additional downgrades and the likelihood that the state's cash crunch would force it to issue registered warrants, giving some state employees IOUs instead of paychecks.
Kathleen Brown, the state's treasurer and a widely mentioned prospect for governor, discusses her role in the budget process in the following interview with staff reporter Debora Vrana.
Among other things, the treasure argues there is legal precedent for addressing part of the deficit over a two-year period encompassing fiscal 1994, even though the California Constitution requires the state to start each year with a balanced budget. She also talks about her call for a hearing on lease financings and her feelings about serving as treasure of the now tarnished Golden State.
Q: California lawmakers and the governor are wrangling as they try to hammer out a budget by July 1. What's your role in the process?
A: I think, first, to make sure that the policymakers understand the importance of addressing this budget crisis in a timely manner. It's never been more important in my lifetime because of the cash crisis. Secondly, within my own office, to provide some budgetary relief. We are doing debt restructuring ... that will probably save $100 million a year.
Beyond that, I've endeavored to look at this budget crisis from the perspective of a banker -- as treasurer, I am the state's banker -- and to suggest ways that the Legislature might address the overall budget problems. And that is where I have come to the conclusion that if the legal objections and obstacles can be overcome, there is a possibility that stretching out payment of a small portion of the deficit may be feasible and appropriate.
Q: Is that a legal option?
A: I think there is a strong legal argument that could be made ... - There is a constitutional directive which says the governor shall propose a balanced budget in January. Well, in past years, the governor has proposed a balanced budget and the Legislature has adopted a balanced budget. Those balanced budgets have fallen out of balance in the course of the year. That's why I think the deficit portion is the one portion that is acceptable to more than one-year treatments. I think there is a legal window there.
In addition, there is case law from the Depression that provides legal support for the notion that the state can borrow across fiscal years when there are moneys expected within a reasonably short period of time that will become available to pay off that borrowing. My comfort level disappears in two years. But I look at a $2 billion piece of the $8 billion deficit as acceptable to two-year treatment.
Q: A rating official said the two-year time frame was not as much of a concern as whether the plan has "teeth." Does it?
A: It's got to have teeth. I've got to go to the marketplace and sell it. If you're doing a deficit financing, you have to go to the market participants. And for me to get the best price possible, I've got to have a credible plan that will show payment of these deficit notes.
Q: Many have compared California's current budget conditions to those of the Great Depression. Do the state's leaders have the will to solve these problems?
A: I think the magnitude of the state's problems are comparable to the late 1930s. The political will? I think it's there. The cash crisis is going to force the Legislature and the governor to deal with this problem. It cannot be covered up, because on July 1 if we don't have a budget, the state of California will go to registered warrants.
That would be an astonishing disgrace for the state of California in the financial markets and in the marketplace of public opinion because it is not necessary. The political leadership owes it to their constituency to get our budget in balance.
Q: Will there be a budget on July 1?
A: I'm hoping for the best and preparing for the worst. If we don't have a budget on time, I think it will be difficult for us to keep our rating. I can argue the strong fundamentals of California and the long-term economic vibrancy of our state, which I strongly believe in, but if we do not have the political leadership to manage this crisis in a timely manner and avoid the issuance of registered warrants, then I would say the rating agencies have no choice but to downgrade us.
But I feel very strongly that the rating agencies ought not to pass judgment until the budget process is completed. And I would feel very strongly that the rating agencies would be acting precipitously if they were to take action on our long-term rating before our political leaders have an opportunity to do their job ...
One reason I think we will get a balanced budget on time is because if we do not, the people of California will be justifiably outraged at the inability of their elected officials to do the job. It's going to involve compromise, negotiation, and politically difficult positions. If they are unwilling or unable to exercise that type of political resolve, then I would expect the term limits to work the old-fashioned way. The voters won't make distinctions between Republicans and Democrats. Everyone will be held accountable.
Q: Let's talk about lease debt. Why do you think issuance of certificates of participation has increased so dramatically -- nearly 70% in 1991 from 1990?
A: The hearing I've scheduled [for Thursday] is to address that very question -- why are public entities using COPs? That is one goal. Equally important is a discussion of what I call "Good COPs, Bad COPs." Such as on "Dragnet," the good cop, bad cop on TV sitcoms. And there are really good COPs and bad COPs in the public marketplace as well. And we hope through this hearing to develop a good government checklist for good COPs.
Obviously, the Richmond [school district's bankruptcy filing] provoked huge market uncertainty. What went on with Santa Barbara and the grand jury was similarly troubling to the COP market. Just as we held the hearing with Mello-Roos bonds, there was a great deal of consternation.
People said, "Oh what are you having this hearing for, it's going to be unsettling to the market. It's going to to destroy Mello-Roos bonds." Well, that was certainly never the intention and it wasn't the result. The market has to have information and it has to have good, thoughful information.
Q: Any last thoughts?
Q: Just that I enjoy my job and the opportunity to make some sense out of what seems to be a very difficult and chaotic time in California's history. I am such a believer in the strength of California as a credit, as a force in our nation's economy and in the world's economy, that I view the crisis that we find ourselves in as an opportunity to redesign and restructure government and the way we do business so that we can be more effective and vibrant as a state. That's the way I look at it.
