University Cash, Makarechian, and Deck Chairs

At the Wednesday and Thursday Regents meetings, Regent Hadi Makarechian, chair of the Finance and Capital Strategies Committee, asked that various items which involved expenditures be pulled off the agenda and pushed the campus chancellors to do a "stress test" based on their cash positions. Our prior posts have audio of the meetings. Go to around minute 41 of Wednesday and minute 51 of Thursday for the discussion.

What is the cash position of the state? Thanks to Jerry Brown's "rainy day" fund plus the good economic climate until recently, the state's cash position is good. If you count all "unused borrowable resources" (which include cash in the various reserve funds plus cash in other state funds that can be internally borrowed), the state finished last year with cash on hand at roughly a third of expenditures.

Because of the heavy dependence on the state income tax (which is heavily dependent on top earners), there is a seasonality of cash flowing into the state. Basically, dollops of cash come in September (estimated payments), January (estimated payments), April (really big dollop which is a combination of net tax due plus estimated payments) and June (estimated payments).

As of February, the latest figure available and mainly pre-coronavirus crisis, the state had about $43 billion in unused borrowable resources. Normally, the net inflow of cash between February and the end of the fiscal year on June 30 would produce another roughly $12 billion. However, the state has followed the federal government and moved the April tax due date to July. And you can bet that those filing estimated taxes for 2020 will reduce their estimates of what they will likely earn this year. Payroll deductions will reflect the mass layoffs now occurring. By July, when income taxes are now due, there may be postponement requests and people simply unable to pay. The other taxes that feed into the state - mainly sales and corporate taxes - are also headed downward in a likely scenario.

The notion that the state will "buy out" the planned tuition increase (consideration of which has now been postponed once again) is becoming more dubious by the minute. And let's not even think about what the stock market decline has done to the funding ratio of the UC pension. (It is noteworthy that the Investments Committee did not meet in conjunction with the larger Regents meeting. No future special meeting of that committee is currently scheduled on the Regents website.)

It is hard to estimate what the state's burn rate for cash will be in the months to come. In the 2001 dot-com crash, the state went from a comfortable cash reserve to a crisis in a couple of years - ultimately leading to the recall of the governor. The burn rate could be a lot faster this time.

Despite the fact that the meeting was in an abnormal teleconference format due to the coronavirus, Makarechian's cautionary position was not greeted with enthusiasm. From the viewpoint of yours truly, however, spending a lot of time talking about SATs and the like reminded him of the moving-around-deck-chairs-on-the-Titanic cliche. The entire meeting should have been devoted to looking at fiscal disaster scenario planning. Then, if someone came up with a magic coronavirus serum in the next few weeks, a "normal" meeting could have been scheduled and we could all have smiled about what didn't actually happen.