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Amid Dire Warnings, State Again Misses Budget Deadline Similarly, most of the state's 72 community college districts would be able to make it through July and August without state payments by using borrowed money or drawing on reserves, said Robert Turnage, vice president of fiscal policy for the California Community Colleges. But if the state misses its September payment "there will be real trouble," Turnage said. Courses would probably be cut, and services such as counseling and libraries could be shut down for one or more days a week. Overarching much of the debate is the court ruling in the Jarvis case. Chief Deputy Controller Walter Barnes said the court decision requires that 180,000 state employees who do not work overtime be paid only the state minimum wage of $6.75 an hour until a budget is in place. Among those who could find themselves making minimum wage are prison doctors, clerks, computer programmers, librarians, engineers, department managers and professors and staff of the Cal State system. Because of the reprogramming needed to change the state's payroll computers, the change is not likely to take effect until the September payroll. Although the state borrowed $11 billion last month, most of it went to repay the previous year's loans. After those payments, less than $5 billion was left to pay expenses during the summer. That's likely to be the last money that banks agree to lend California until it demonstrates its ability to agree on a budget, Westly said. "The state of California is at the end of its borrowing ability." Westly added: "We are rapidly running out of money. The lines cross the end of August or early September." Wall Street analysts warn that the state risks a further downgrade in its credit rating. "The concern this time is the budget hole is much bigger" than in previous years, said David G. Hitchcock, director of state and local government ratings at Standard & Poor's in New York. Hitchcock said the gap between California's spending and its income is so large the state is going to have to continue borrowing in coming years "even if they make massive cuts and have a big tax increase." Ray Murphy, a senior credit officer at Moody's Investors Service in New York, has assigned a negative outlook to California. The state's failure to approve a budget on time was expected, "particularly in a year with such polarization," he said. "There are so many significant items that require political consensus which we just haven't seen to date." Murphy added that the recall campaign against Davis is "only complicating matters and adding to the uncertainty surrounding the state's current state of affairs." Budget Director Peace said the Davis administration doesn't know "at what point the rating agencies will take us below investment grade." But if the state's credit rating falls into the junk bond range, Peace is certain of one thing: "All of our future borrowing will be more expensive." For instance, the state last month borrowed $11 billion to repay last year's short-term debt and cover cash needs during July and August. The new loan will cost taxpayers more than $210 million in interest and credit enhancement fees paid to seven banks and investment houses. The state's credit rating is so poor that it paid almost $85 million to the banks to use their credit rating instead.
If the state's rating drops two more notches to junk bond status, the cost of that loan will automatically increase by $55 million. And if California cannot repay the money
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