Jason Sisney of the Legislative Analyst's Office (LAO) has a lengthy piece in his Substack blog on this paradox. In essence, despite the squeeze, we are not likely to have an experience similar to what occurred in the Great Recession of 2008 when the issue was whether the state could pay its bills. That kind of experience was the result of having little cash with which to adjust. That is not the case now: [Excerpts]
During the administration of Governor Gavin Newsom, California’s state treasury liquidity—loosely what one can think of as the state government’s “cash position” or “cash on hand”—has improved dramatically. On April 30, 2018, the year before he took office as chief executive, unused and available balances in state government funds totaled $35 billion. On April 30, 2025, these balances totaled more than $111 billion. (These state government balances do not include state and local pension fund holdings—for example, those of CalPERS and CalSTRS.) California’s current cash on hand is among the strongest for any subnational government’s operating funds ever...
...The 2008-2009 cash crisis precipitated some of the hardest decisions of the dreadful 2009 state budget cycle, such as the bond funding freeze. Without warning, these big funding streams counted on by contractors, local governments, and non-governmental organizations were abruptly cut off. There was no rainy day fund, and there was a dwindling supply of state cash that had to be preserved to make sure bond debt service and state payroll were paid each month.
Bond debt service is contractually obligated, but also essential to pay on time since borrowing from the bond markets can be a key tool for managing a period of public budget distress. Bond market trust is essential for public budgeting. Salaries have to be paid on time for most state workers to keep basic state services going and avoiding large late payment penalties under labor laws.
In the years after the cash and budget crises of the Schwarzenegger years, Governor Brown and the Legislature benefited from a growing economy and stock market. They worked diligently to improve the state’s financial health, advocated voter approval of Assembly Speaker John Pérez’s rainy day fund proposal (ACAX2 1 of 2014), and changed to a more conservative manner of state budgeting that emphasized multiyear forecasting and used portions of projected surpluses for one-time spending, not just ongoing commitments and restorations. In August 2019, Legislative Analyst Gabe Petek wrote about the “quiet transformation of California’s cash management” over the prior decade. In December 2018, marking the tenth anniversary of the state’s cash crisis, his office released a report noting “the state has made undeniable progress” that “few could have predicted” a decade before.
The COVID pandemic seemed to threaten that progress, but federal fiscal and monetary stimulus produced instead a boom of sorts for the economy and state budget that brought new opportunities and challenges.
...Every time that the budget has a projected deficit, Governors and legislators agree to use balances from outside the General Fund—principally from the state’s “special funds”—to help balance the budget. This is one way to temporarily delay more difficult budget actions, such as program cuts or tax increases. It is a very important way that the state’s strong cash position helps address projected deficits.
California case law gives the Legislature broad authority to loan available special fund balances to the General Fund to help address projected deficits. Special funds typically receive money from fees, such as user fees or license charges, dedicated to a specific state department’s services to the public. Courts have given the Legislature significant flexibility to decide when special funds lend money to the General Fund and when and how the loans are paid back.
...So, if the state’s cash position is so strong, why are such difficult budget cuts and even some tax increases needed now? Basically, it comes down to this: an ongoing imbalance of revenues and expenditures eventually would consume all the cash. Cash cannot balance the budget over a long period.
...In the end, revenues and expenditures of the state will always differ from the projection, and the decision of how much or how little to balance the budget now from non-recurring sources like cash balances is a subjective one.
But, having big cash balances in the state treasury: it’s much better than having small cash balances. California has learned that lesson over the last two decades.
Full story at https://jasonsisney.substack.com/p/deficitsand-a-strong-cash-position.
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