Sacramento - Today's the deadline for Gov. Arnold Schwarzenegger and the Legislature to close a $24.3 billion deficit so the state controller can get emergency loans to help California avoid running out of cash next month.

California Gov. Arnold Schwarzenegger gives a speech about the budget. (Photo: Getty Images)

    But the budget deficit remains far from being solved, and without a solution the state will probably be forced to delay payments to local governments, vendors and others at the end of July.

    The Legislature's Conference Committee on the Budget continues working today to examine Schwarzenegger's proposals to close the gap and craft its own alternate plan.

    The deadline itself became moot last week when Schwarzenegger refused to allow Controller John Chiang to take out emergency short-term loans. Instead, the governor gave the Legislature an ultimatum: Solve the budget or shut down government operations.

    From today on, Schwarzenegger said, every day that passes without closing the deficit is a step toward insolvency.

    "Now, the controller has already said that the deadline is June 15," the governor said Friday in a public appearance in Escondido (San Diego County). "In fact, this week I sat down with the controller and also with the treasurer. We all agreed that after June 15, every day of inaction jeopardizes our state's solvency and our ability to pay schools and teachers and to keep hospitals and ERs open."

    The state's priorities for getting things paid fall in this order: education and debt payment, special funds, pension obligations, payroll and Medi-Cal payments.

    Earlier this month, Chiang, who has the responsibility of paying bills on behalf of the state, told Schwarzenegger and the Legislature that unless they plug the deficit, the state is on pace to run out of cash by July 28.

    Running Out of Options

    The only money-raising authority Chiang has is to use emergency short-term loans from Wall Street that do not have to be repaid until next year. The loans have high interest rates and fees, though.

    But such borrowing also has to be approved by Schwarzenegger, who wrote a letter to Chiang on Thursday saying he would not support such a move.

    In an interview with The Chronicle, Chiang said that if the state runs out of cash, he'll have only two options to deal with the situation: delay payments to vendors, local governments and even taxpayers still awaiting refunds, or issue IOUs, which he considers a last resort.

    "We have less tools in the tool kit to handle the cash challenges to the state," Chiang said, referring to the governor's refusal to allow emergency borrowing.

    Avoiding Emergency Debt

    Lawmakers said emergency borrowing can be avoided if they enact a plan by the end of this month that eliminates the deficit through next June.

    "I am confident that we are going to get this all done by June 30," said Senate President Pro Tem Darrell Steinberg, D-Sacramento. "And I think that's really the deadline."

    The new fiscal year begins July 1, and even if leaders have a balanced budget in place by then, the state will still need to take out short-term loans to avoid a cash crunch at the end of July. The so-called revenue-anticipation notes, which are commonly used by state and local governments for cash-flow purposes, are sold to Wall Street investors by the state treasurer and are repaid in the same fiscal year.

    Tom Dresslar, a spokesman for Treasurer Bill Lockyer, said for his boss to get the short-term loans, "we need to have a credible budget in place by end of June."

    "A credible budget solution would mean that the $24 billion problem is solved in its entirety and that they are credible, without gimmicks, no shell games, no accounting tricks. A real credible budget that (Wall Street) would believe in," he said.

    Battle Between Parties

    Getting that kind of solution will not be easy, with Democratic lawmakers saying they cannot support solving the entire $24.3 billion deficit without new forms of revenue. The Republican governor and GOP lawmakers say they will not support tax increases.

    Steinberg said he believes that almost $20 billion of the shortfall could be solved using most of the ideas that Schwarzenegger has proposed, but Democrats will not consider wholesale elimination of health care to poor children, cash grants to college students, and programs that help single mothers find jobs.

    "There are certain things we're not going to do," Steinberg said. "We'll have to find another way, and that other way could include revenues."

www.truthout.org/061509E