Featured Column: Do Federal Shutdowns Increase Risks to California’s Cash Strategies?
As Controller, one of my principle responsibilities is to wisely manage the State's cash resources on a daily basis. During the tough economic times we have experienced in recent years, my greatest challenge was to ensure that we had enough cash in the State Treasury to cover our most pressing and immediate obligations, specifically paying our bond holders and our schools. While those crises are now behind us in California, the recent standoffs and related government shutdowns in Washington require us to focus on another part of our financial equation: What are the real cash consequences of federal shutdowns in California?
Planning the State’s Cash
After the Governor signs the annual budget, my office works with the Department of Finance and the State Treasurer to estimate the timing of incoming revenues and outgoing expenditures through the time period covered by that budget. If projected expenses exceed projected resources for any particular day, the State may borrow from special funds – and when those are exhausted, from private investors through short-term, low-interest loans. By using historical patterns and the best data available, my office looks at these projections and determines the borrowing necessary to cover the State's cash needs, while also providing a prudent reserve in case of emergencies.
But even the best data and historical patterns will not always tell you the full story of the 12 months ahead. When looking at the future, my office is aware that revenues may be delayed or spending accelerated for a number of reasons. This cash report is prepared and published every month to provide everyone a current, timely picture of the State's cash flows, and how important they are to the fiscal health of California.
Until recently, the question of timing has only focused on State revenues and payments, with the majority disbursements (approximately 75 percent) going to local governments. But the timing of federal fund delivery has not, historically, been a major factor in the State’s projected cash flows.
That may change.
Should Cash Planning Account for Federal Shutdowns?
Each year, more than $50 billion in federal funding for a variety of programs flows to California, and through Sacramento, to thousands of local governments to provide public services.
In 2006-07, for example, the budget identified nearly $53 billion in federal funds. That same year, General Fund spending was about $101 billion, so the ratio of federal-to-State funds was about 50 percent. Two years later, with State revenues faltering and federal stimulus funds flowing, the allocations were nearly even – the federal government allocated $89 billion and the General Fund allocations were about $87 billion. Even now, as the federal stimulus monies run out, the federal-to-State ratio is nearly 90 percent.
Figure 3 displays the federal and General Fund allocations for the last 10 years. It shows the gap between budgeted federal and State General Fund revenues closing over the 10-year period. The smallest gap (shown with the dotted red line) occurred during the recent recession. The narrowing gap suggests the State’s dependence on timely delivery of federal funds may be growing.
If federal revenue becomes a greater share of overall budgeted revenues, the State becomes more susceptible to interruptions or delays in federal disbursements. If the federal government were to suspend payments to the State – and if the State were to backfill federal losses – the State's cash position becomes all the more difficult to maintain, depending on:
Timing: Is the federal delay in a month when the cash reserve is slight?
Duration: Each delayed day will compound the cash flow problem. If the federal delay were to exceed a month, the State could incur a great imbalance.
Congressional selectivity: Not all federal disbursements flowing to the State may be affected in a government shutdown. This depends on which budgeted federal programs see delays.
State responses to federal delays could lead to higher cash reserves, larger short-term borrowing amounts, higher borrowing costs, and/or greater flexibility in adjusting state disbursements.
For three years now, states have lived with an uncertainty about federal shutdowns and the threat of delayed federal disbursements. In the last 10 months, Congress has acted on three separate occasions to ensure continued federal disbursements. Given the interdependence of State and federal operating cash flows, my office is not only focusing more sharply on the flow of federal funds, but the State may need improved strategies for managing its cash in the face of future federal delays.
Figure 3: State/Federal Fund Interdependence Grows
Expenditures through the Budget Act, State General Fund and Federal, 2004-05 to 2013-14 (California fiscal year)
Source: LAO (10/17/13)