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Last Updated: 2/7/2014
Budget Issue: Interest on cash and special fund loans likely below administration estimates
Program: State Borrowing Costs
Finding or Recommendation: We find that costs of the state's cash management and budgetary loans likely will be tens of millions of dollars less than the administration estimates in 2014-15.
Further Detail


General Fund Cash-Flow and Budgetary Borrowing. Because General Fund revenues and expenditures tend to peak in different months, the state regularly borrows from internal sources (the state’s hundreds of special funds) and external sources (the revenue anticipation notes [RANs] sold annually to investors) to ensure there is sufficient cash available to meet payment obligations throughout the year. This is known as the state’s “cash-flow borrowing.” The state also has lent special fund balances to the General Fund in recent years to help address annual budget deficits. As of December 2013, $4.5 billion of such loans were outstanding. Special fund lending to the General Fund is known as “budgetary borrowing.”

Item 9620 of the State Budget Plan. Item 9620 of the state’s annual budget plan funds the General Fund’s interest costs and other expenses related to both cash-flow and budgetary borrowing. During the annual budget process, the Legislature has the opportunity to determine the amounts estimated (or “scored”) for these interest costs in both Item 9620 in the annual budget bill and a “non-budget act” portion of Item 9620.

In the annual budget bill, Item 9620-001-0001 (currently estimated to be $60 million by the administration for 2014-15) pays for interest and other costs related to internal cash-flow borrowing, and Item 9620-002-0001 (estimated to be $54 million by the administration) pays for interest related to the budgetary loans that the Legislature chooses to repay each year. Separate from the budget bill, Item 9620 also pays for statutorily appropriated RAN interest costs. The administration estimates this non-budget act portion of Item 9620 at $60 million for 2014-15. Combined, these add up to a total $174 million of interest and related borrowing costs estimated by the administration for 2014-15 in Item 9620.

Augmentations Automatic If Costs Are Higher. Unlike most items in the annual budget plan, Item 9620 interest costs will automatically be paid if interest costs prove to be higher than budgeted. Both Items 9620-001-0001 and 9620-002-0001 include provisional language appropriating “any amount necessary” to pay required internal borrowing and budgetary loan interest costs. For RAN costs, Section 17310 of the Government Code also provides for payment of any amounts necessary for interest costs. In general, our advice to the Legislature is to score interest costs based on the best estimate available at the time the budget is passed. In the event that costs exceed (or are below) this estimate, the General Fund reserve will be less (or more) than budgeted.

LAO Finding

Interest Costs Likely Will Be Less Than Administration Estimates. As noted above, the administration estimates that 2014-15 interest costs will be $54 million for interest related to budgetary loans and $60 million each for internal and external cash-flow borrowing. We find that the estimate for interest costs related to budgetary loans ($54 million) is reasonable given the loans proposed to be repaid. Regarding internal cash-flow borrowing, costs were $50 million in 2012-13 and are estimated to be $40 million in 2013-14. The $60 million budgeted in 2014-15 will probably prove to be too high given that the state’s cash position appears better than in recent fiscal years. Lastly, external borrowing costs were about $48 million on a $10 billion RAN in 2012-13 and are estimated to be about $16 million on a $5.5 billion RAN in 2013-14. For planning purposes, the budget proposes a RAN of $3.5 billion for 2014-15. We find that external borrowing costs associated with the 2014-15 RAN will probably prove to be significantly below the administration’s current estimates. (In any event, the Legislature will need to revisit Item 9620 after the May Revision to conform the budget bill estimate of budgetary borrowing interest costs with the list of special fund loan repayments it chooses to authorize.)

In total, Item 9620 costs likely will prove to be less than the administration now estimates—probably by an amount in the low tens of millions of dollars. The administration’s January estimates are provided for planning purposes, and these are typically updated with the May Revision, at which time we will be able to reassess the scoring.

LAO analysis prepared by: Ryan Miller. Reviewed by: Jason Sisney.