The Issue: California Governor Arnold Schwarzenegger wrote a letter to US Secretary of State Henry Paulson notifying him that the State of California might need a $7 billion loan in the next few weeks in order to make major payments needed by the state until quarterly taxes can be collected.  Normally this type of short-term loan could be issued by a private lender, but given the current state of the lending industry in the United States, banks are unable to issue such a loan.

This is a serious issue.  The ability of California to pay its bills could have serious adverse effects on the state.  Schwarzenegger has stated that major payments needed to be paid to California schools in order to make payroll commitments and other education funding needs.  The same can probably be said for firefighters, police, hospitals and other publicly funded entities.

This problem might have been avoided of California had passed their budget on time.  The California budget was passed 85 days late and prevented the California Treasury Department from analyzing the budget’s short term revenue gaps until after the money is already due.  Both Democrats and Republicans are blaming each other for the inability of the Legislature to pass a budget, each claiming the other side was not willing to compromise.

My Take On It:

If the Legislature won’t cut spending, state agencies can take it upon themselves to save money.

Public agencies have developed a trend of using at least every penny they are allocated from the State as a tactic to justify a need for more money in the next fiscal year.  The rationale is that if a state agency doesn’t use their whole budget, they don’t need as much next year and definitely don’t need an increase.  This leads to major expenditures occurring at the end of the fiscal year.  Centain departments decide they need newer computers or plasma television monitors in order to do their jobs effectively.  If school administrators, for instance, took it upon themselves to effectively manage their budgets and use less than they were allocated, the State would not have as large of a short term revenue gap, and certainly wouldn’t need to increase education funding in future cycles (except to account for inflation and population increases).

This really doesn’t help us in our current funding need, but maybe this incident can be the oportunity for public administrators to re-evaluate their spending patterns.