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Managing State Finances During Fiscal Crisis
A global recession coupled with a historic housing downturn and Wall Street meltdown significantly affected each of the State's three primary sources of revenues -- personal income, sales and corporate taxes. As a result, California faced a multi-billion budget imbalance and insufficient funds in the State's treasury to meet all of its payment obligations.
To preserve enough cash to meet the State's Constitutionally-required payment obligations to bond holders and schools, Chiang was forced to take the extraordinary step of delaying $4.2 billion in personal income tax refunds, money owed to private businesses and other payments during February 2009. Facing a similar cash crisis in the Summer of 2009, the Controller was forced to issue IOUs for only the second time since the Great Depression.
In affirming its bond rating for California in March 2010, Fitch Ratings noted the State’s ability to manage continued budgetary and cash flow risks, stating, “Over the last two years, the controller has demonstrated a willingness to use several strategies, including payment deferrals and IOUs, to ensure continuation of priority payments and has expressed his commitment to take such actions again as necessary.”
Similarly, Standard & Poor’s, in January 2010, said, “Despite its problematic areas, we believe the state's budget and finances benefit from a number of attributes, including…(t)he state controller's demonstrated willingness and authority to exercise what we consider to be extraordinary cash management maneuvers that protect the state's priority payments, including those for debt service.”
In calling for better budgeting by the Governor and Legislature, the Daily Munis and Derivatives, published by Merrill Lynch on July 1, 2009, stated: “The state controller exhibited courage and resolve in February 2009 when left with no recourse than to remit IOUs and prioritize cash outlays."
And the California Municipal Bond Advisor in March 2010, noted, "State Controller Chiang has been a hero of sorts to us during California’s recent distress because he did just what he was supposed to do to protect bondholders... (by) conserving cash flow to make sure California could cover top-priority funding requirements such as education and debt service."
As recently as May 6, 2011, Standard & Poor's California Analyst Gabe Petek was quoted by CNBC story as saying, "We have seen the state controller's actions in recent years, including implementing payment deferrals and IOUs as respecting (the state's) priority payment structure. This has been supportive of the state's credit quality in our opinion."