California LAO Cash Balance Recommendations: Urging Fiscal Prudence

• The California Legislative Analyst's Office reported the state holds an "astonishing" $90 billion cash balance, peaking at over $100 billion in May 2024.
• This internal reserve allows California to manage cash flow without external borrowing, saving interest costs and avoiding bond market reliance.
• The LAO advises against further cash borrowing to balance the budget or delaying repayments, emphasizing the need to preserve fiscal resilience amid economic uncertainty.
• The cash balance accumulates from appropriated but unspent funds, often due to delayed infrastructure projects, and has been used for purposes like a $6 billion CalPERS payment and interest-free budget balancing.
• Despite its benefits, the LAO warns the balance doesn't guarantee a strong financial foundation and carries risks, viewing its projected decline as a return to normal rather than a crisis.

The Legislative Analyst's Office underscored the importance of preserving the state's fiscal resilience, particularly given the prevailing economic and financial market uncertainties.

The California Legislative Analyst's Office (LAO) recently highlighted the state's "astonishing" cash balance, detailing its significant internal financial resources. This balance, which represents funds the state controller can tap to cover expenses, currently stands at $90 billion. It reached its zenith in May 2024, exceeding $100 billion. This substantial reserve allows California to manage its daily cash flow without resorting to external borrowing, thereby avoiding interest costs and reducing reliance on the bond market. While the cash balance remains strong, the LAO's report indicates it is on a downward trajectory and is projected to continue declining.

Despite the current strength of these reserves, the California LAO cash balance recommendations include a strong caution against actions that would accelerate its depletion. Specifically, the LAO advised lawmakers against further cash borrowing to balance the budget or delaying the repayment of existing internal financial maneuvers. The office underscored the importance of preserving the state's fiscal resilience, particularly given the prevailing economic and financial market uncertainties. This stance reflects a significant recovery since the Great Recession, when California faced a severe cash crisis, and the LAO aims to prevent a return to such vulnerabilities.

The state's unique revenue cycle, where half its general fund income arrives over just four months while bills accrue year-round, necessitates borrowing to meet obligations. For a decade, California has successfully used its internal cash balance to avoid external borrowing, even amidst sharp revenue declines following the COVID-19 pandemic. It is important to note that the state budget is not directly tied to this cash balance, as the funds utilized by the controller often originate from sources like gas taxes and fees, which are typically less susceptible to fluctuations in capital gains.

The accumulation of California's substantial cash balance is largely attributed to funds that have been appropriated but not yet disbursed. A significant factor contributing to this has been the influx of additional state and federal dollars designated for infrastructure projects, where slowed timelines have resulted in funds remaining unspent for longer periods. These internal resources have proven instrumental not only for routine California state cash flow management but also for achieving specific policy objectives.

For instance, in the 2017-18 budget, $6 billion from the cash balance was allocated as a one-time payment to the California Public Employees’ Retirement System (CalPERS). This amount is progressively repaid from the general and other funds over time, and when combined with ongoing annual pension contributions, it generates net savings over the years. The cash balance has also been strategically employed to balance the state budget, effectively functioning as an interest-free loan where expenses are delayed, creating "savings on paper" that require future repayment. The LAO acknowledges that such a large cash balance offers "genuine benefits," particularly in reducing bond market dependence and saving interest costs, lessons learned starkly during the Great Recession-era cash crisis.

While beneficial, the California Legislative Analyst's Office report cautions that a robust cash balance does not inherently signify a strong financial foundation and carries its own set of risks. A key concern highlighted is the potential for a disincentive to repay when the beneficiaries of internal borrowing are not the same entities responsible for its eventual repayment. Historically, the state's cash balance represented between 15% and 20% of its annual general fund disbursements prior to the Great Recession.

This proportion grew significantly, reaching 25% to 30% of disbursements in the period between the Great Recession and the pandemic, and currently stands at approximately 35%. The LAO views a decline in this cash balance as a return to more typical levels rather than an indication of a fiscal crisis, emphasizing the need for prudent California internal borrowing policy. These LAO recommendations state finance practices underscore a shift towards more conservative fiscal management.

Lawyers advising clients on California state contracts or public finance should note the Legislative Analyst's Office's warning against further cash borrowing for budget balancing, as this signals a potential shift towards more conservative state fiscal management which could impact future funding availability or project stability.

Source: Original reporting via Courthouse News Service.