Sound Familiar?

I've been up late tonight doing some research for a public event I'm moderating next Monday, June 29, with former Gov. Pete Wilson at the RAND Corporation in Santa Monica. In the process, I came across the below article from the Los Angeles Times, published in June 1994. In the piece, California has a budget problem and a cash flow problem. The state controller is threatening to issue IOUs. Sound familiar?

By DANIEL M. WEINTRAUB, TIMES STAFF WRITER
June 16, 1994

SACRAMENTO - Raising the specter of issuing IOUs once again, state Controller Gray Davis said Wednesday that Gov. Pete Wilson's proposed budget "does not fly" because the state cannot show that it will have sufficient cash to repay the loans on which Wilson's plan depends.

A $2.7-billion accounting error led the Republican governor to overestimate the state's cash reserves, and now Wilson has nothing to back up his two-year borrowing plan but a fragile hope for a huge infusion of federal funds the year after next, Davis said.

"We have cried wolf before," said Davis, the state's chief fiscal officer. "Believe me, this time the wolf is at the door. The wolf is here."

Wilson is required to have Davis' approval to go to Wall Street for $5 billion in cash that the state needs to borrow in late July to pay employees, aid the schools and keep prisons and parks running.

But without major changes in Wilson's plan, Davis said, he will not grant that approval.

"The governor's budget plan does not fly," Davis said. "It is a cut-and-paste job that does not sell on Wall Street."

Davis said he will begin issuing IOUs, officially known as registered warrants, in early July if a credible spending plan is not in place by then. The fiscal year ends June 30.

The scrip would go to private companies owed money by the state, Medi-Cal doctors who care for the poor, and others. The courts have ruled that the state cannot pay its employees with IOUs, so Davis said he will husband what little cash is in the government's accounts to meet the payroll.

Wilson, in a statement released by his office, did not respond directly to Davis' criticism but said he will work with the controller and Legislature to "provide the necessary assurance to the financial markets that California remains a solid investment."

The state for years has been wrestling with parallel but distinct fiscal problems, one in its budget and the other in its cash flow.

It is possible for the state to run up a deficit in its general fund without going broke, and the state has been doing so for several years now. When this happens, the government can pay its bills by borrowing from various independent, internal funds.

This practice is analogous to a family that spends more than it takes in but manages to stay afloat by borrowing from the children's college fund. After too much deficit spending, however, the college fund runs dry, and the family is broke. That is where the state is headed today.