July 30, 2009

Governor Signs Budget – How Long Will It Last?

By David Walrath

Governor Schwarzenegger has signed the latest version of the 2009-10 State Budget. After vetoes, the budget has a technical $500 million reserve. The Legislative Analyst has released their review of the signed budget (www.lao.ca.gov).  There is no celebration.

California still is issuing IOUs and will not be able to go into the credit market for a couple of weeks. That means IOUs will continue for awhile. Even when the state’s cash flow improves, that does not mean schools will have positive cash flow. The state is delaying and deferring school payments in order to protect the state from needing even greater borrowing.

It is possible the national economy has reached bottom and will start improving with positive Gross Domestic Product for the July – September quarter. This national recovery; however, will not trickle to California until later in the year. California recovery should start in January and should be a moderate recovery. That is the good news. Moderate recovery starting in January could mean the state revenue estimates are too pessimistic. Moderate growth will mean further education cuts do not need to be made. Moderate growth means unemployment does not reach 14%, but it does not mean unemployment drops to 8%. Expect California unemployment to stay in double digits for much of 2010. Moderate growth means that California stays broke, but is not going into bankruptcy and that is good news after the last 18 months.