State cash crunch looms, redevelopment ends, budget debate begins

The state controller warned legislative leaders Tuesday of a pending cash crunch in the coming weeks that risks the use of IOUs and delays issuing tax refunds.

The red flag came as members of the Assembly's budget committee held their first in-depth hearing examining Gov. Jerry Brown's 2012-13 budget proposal - with some committee members taking the opportunity to raise concerns about the administration's plans for restructuring the school spending system and to delay the start of the transition kindergarten program.

Finally, officials from the governor's Department of Finance engaged in a midday webinar on issues related to today's scheduled dissolution of redevelopment agencies in California and the reassignment of billions of dollars in tax increments to local government and school districts.

Perhaps of greatest concern was the correspondence from Controller John Chiang to budget chairs in both houses calling for $3.3 billion in cash solutions that will be needed before April to avoid a liquidity squeeze.

Chiang noted that tax revenue through the end of December is running about $2.6 billion below expectations while expenses are running $2.6 billion above.

The controller said that a management plan has been under discussion between his office, state Treasurer Bill Lockyer and the Department of Finance. That plan would include a combination of payment delays as well as both external and internal borrowing.

Chiang also urged passage of SB 95, which would allow borrowing from some internal state funds now off limits, including the Highway Users Tax Account, Transportation Investment Fund and the Motor Vehicle Fuel Account.

Imposing yet another apportionment deferral to schools, however, does not seem to be among the options being discussed. Rick Simpson, chief education advisor to Assembly Speaker John Perez, D- Los Angeles, said in an e-mail that there is already a sense too many dollars have been deferred from schools and additional deferments would be an unpopular choice.

On that note, Legislative Analyst Mac Taylor told members of the Assembly's Budget Committee that he continues to worry over revenue projections made by his office and the far more optimistic forecast made by the administration.

Taylor said the major disagreement is over the collection of personal income taxes - especially capital gains paid by high income earners.

He said his office will be updating its revenue forecast at the end of February, which might be a better time for the Legislature to consider taking further action. But Taylor also said lawmakers could wait until after the April tax collections have been counted in early May.

Our view is that there is more downside risk to the administration's numbers right now but you can wait until we get some better numbers," Taylor said.

On the issue of redevelopment dissolution, Mark Hill, program budget director at the Department of Finance, said that under ABX1 26 - the first call on tax increment funds will be debt owed by the closing redevelopment agencies with school "pass-through" funds next.

He said each six months of new property tax revenue would then be forwarded by county auditor-controllers to local agencies - including school districts - according to their share of the funds as determined by the legislation. The dates for distribution are mid-January and early June.

Less certain is when other redevelopment agencies assets might be sold and turned into cash and subsequently divided among recipient entities. He said the successor agencies - typically cities and counties mandated to manage the redevelopment dissolution - will need time to determine the values of some of the assets and how best to liquidate them. Hill said there likely will be a multiple payments out of these assets over several years.