The Twin Crises

Browsing the papers today, I'm noticing quite a bit of confusion between the parallel crises California faces with respect to the budget. Jean Ross explains the difference pretty nicely between a cash flow crisis and a budget crisis in this post. The Legislative Analyst identified a cash crisis that arises out of the difference between when payments are due and when revenues enter the state's coffers. Because of that disparity, California and most other states must go out into the bond market and sell "revenue anticipation notes" to cover short-term cash needs, to be repaid when the revenue comes in. The budget crisis exacerbates the cash flow crisis, but the two are not the same thing. And the Legislative Analyst himself appeared to conflate them by claiming in his report that California faces $17 billion dollars in borrowing needs, but failure of Prop. 1C, 1D and 1E would require $23 billion in borrowing. Well, so would passage. Prop. 1C enables the government to BORROW against lottery revenue. This may not be short-term notes, but borrowing is borrowing, and due to the state's horrific credit rating, the interest rates will remain high no matter what kind of borrowing it is.

That borrowing will cost the state money and widen the deficit somewhat, but a decent amount of that is known beforehand, and baked into the cake of any budget deal. As Ross notes, the Legislative Analyst did not update his projection that the state faces an $8 billion dollar shortfall through July 2010, based on lower revenues than the projection in the February budget. However, John Chiang today estimated that current revenues through April are $2.1 billion out of balance with budget projections. According to the Legislative Analyst, this shortfall can be added to the $8 billion, because most of that referred to the next fiscal year. Doing the math...

Meanwhile, the Public Policy Institute of California just released a poll showing Propositions 1C, 1D and 1E trailing. Those measures would provide $5.8 billion in budget cash in 2009-10. Of particular concern for budget officials is that Proposition 1C is failing badly (32 percent for, 58 percent against), since it would provide $5 billion in cash.

If the ballot measures fail, the state would be looking at a $16 billion deficit (the LAO's $8 billion plus Chiang's $2.1 billion plus the ballot's $5.8 billion). But the LAO number came in March, after which economic indicators grew worse, which means the overall deficit figure could be higher than $16 billion.

Meanwhile, in the above-linked LA Times piece, the Schwarzenegger Administration floats a proposal to significantly address the prison overcrowding crisis:

As the ballot measures lag in the polls, the administration of Gov. Arnold Schwarzenegger has begun revealing the cuts it is weighing as an alternative.

On Thursday, the administration advised law enforcement officials that it was preparing plans to commute the sentences of 38,000 state prison inmates, including all illegal immigrants. It also is considering closing some prisons and sending inmates to county jails, according to a copy of the proposal obtained by The Times.

Under the plan, 19,000 illegal immigrants -- 11% of state prisoners -- would be turned over to the U.S. Immigration and Customs Enforcement Agency after having their sentences commuted. An additional 19,000 "relatively low-risk offenders" would have their sentences commuted as well.

The Governor tried this late last year and nothing really happened with it. Some of these ideas are OK and some are horrible - overburdening county jails won't exactly help either fiscally or from a public safety standpoint. But if the crisis can actually start a dialogue about our insane prison policies, I'm all for it.