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California Owes Itself $4.6 Billion

| July 24, 2013
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Gov. Jerry Brown has made paying off California’s $27 billion “wall of debt” a top priority. But one of the largest creditors that the state owes money to is actually itself.

Gov. Jerry Brown, Senate President Pro Tem Darrell Steinberg and Assembly Speaker John Perez discuss the 2013 budget. (Scott Detrow / KQED)

Gov. Jerry Brown, Senate President Pro Tem Darrell Steinberg and Assembly Speaker John Perez discuss the 2013 budget. (Scott Detrow / KQED)

A report released last week by the Department of Finance shows 132 loans taken out from special government funds over the past decade add up to a $4.6 billion debt.

The tab is the cumulative result of a politically advantageous maneuver governors and legislative leaders from both parties have practiced for years. The idea is to take extra money from, say, the Gambling Control Fund, use it to pay for broader government spending, and then repay that money at some point down the line.

The political cost is relatively low, since the budget typically only borrows money from funds with extra cash. As Governor Brown’s finance director, Ana Matosantos, explained, “the dollars that are borrowed are based on what funds have reserves in them, and have dollars available after maintaining the level of program that the Legislature has authorized.” But the totals add up. The Department of Finance’s latest report shows the state owes $671 million to nine different transportation-focused funds; $611 million to the Unemployment Compensation Disability Fund; and $500 million to the Air Resources Board for money borrowed from California’s cap-and-trade auction revenue earlier this year.

(The cap-and-trade loan infuriated environmental groups, since the auction revenue is supposed to fund clean energy efforts. Brown said the delay will lead to more efficient spending when the money is eventually allocated.)

Brown’s debt-repayment plan would lower these fund-to-fund loans from $4.6 billion to $500 million by 2017 – this year’s budget repaid $184 million to 11 funds – but the inter-fund loans take a back seat to money  the state owes bond holders, local governments and schools.

That approach makes sense to Ryan Miller of the Legislative Analyst’s Office, who said the only cost the state faces is accumulating interest. “But especially in recent years,” he said, “those interest rates have been very, very low. Near-zero. And so the state is kind of in a sense borrowing, almost for free, from itself.”

“Piggybanks For The General Fund”

The practice has its critics. Curtis Child, the chief operating officer for California’s Administrative Office of the Courts, says the state’s judicial system felt the impact when budget crafters borrowed $350 million from its construction fund in 2011. “We certainly had to take a look at our projects,” he said. “We had to slow some projects down and look at the long-term funding of those.”

The budget borrowed an additional $90 million from another judicial fund that year, too, and that money, combined with hundreds of millions of dollars that has been moved out of the construction fund with no promise of repayment has led to the delay of more than 20 court construction projects.

The judicial system was supposed to get $90 million back this year, but that payment has been delayed for another two years.

“What these special funds have changed into is piggybanks for the general fund in which the general fund can tap into, either to take outright or at least borrow,”  said Jon Coupal, the president of the Howard Jarvis Taxpayers Association. Coupal argues that if all these funds have all this extra money laying around, then maybe the fees that feed them are too high. He also voiced a legal concern: that fees, which are approved with simple majority votes, are being used to supplement taxes, which require 2/3 support. “If this money’s just being used to supplement the general fund, does it not change into general fund revenue?”

As California’s finances have steadied in recent years, fewer loans have been taken out from these special funds. The 2011 budget relied on 28 different loans, 2012’s spending plan had two, and this year’s budget utilized only one.

That $500 million shift from cap-and-trade revenue, however, is now the largest outstanding single fund loan on the state’s books.

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Category: Politics, State Budget

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About the Author ()

Sacramento bureau chief Scott Detrow covers state government, politics and policy for KQED News and its statewide news program, The California Report. Before joining KQED, Scott reported on Pennsylvania's natural gas drilling boom for NPR's StateImpact project. Reach Scott Detrow at sdetrow@kqed.org.
  • John Hernlund

    This is an unfortunate side effect of allowing financiers to run our governments, just like they run our corporations…a great big house of leveraged cards. This is unacceptable.