Local governments in California are scrambling to respond to the state government's decision to delay nearly $3 billion in funds for them, with some tapping reserves to keep programs fully funded.

The delay, announced Monday, was anticipated after a law passed earlier this year giving officials in Sacramento authority to defer payments to local governments. The state government has in prior years used local coffers for its own budget purposes.

Governor Arnold Schwarzenegger and lawmakers remain far apart on a state budget. Delaying funds gives state finance officials more flexibility in managing the state's cash until a spending plan is in place.

"We're sort of in the mode where we expect any and all things from the state," Ryan Alsop, an assistant chief executive for Los Angeles County, said Wednesday.

He noted that Los Angeles County must find an estimated $83 million to bolster its welfare budget.

Officials of California's largest county are not alone in feeling the squeeze. School districts across the most populous U.S. state will be pressed to stretch their dollars because Sacramento is also postponing payments to them.

"We'll try to manage over the short term by keeping an exceptionally vigilant watch over our cash flow," said Troy Flint, a spokesman for the 46,000-student Oakland Unified School District.

The deferrals are necessary so the state can better manage its own cash to avoid having to issue IOUs again, perhaps as soon as next month, according to State Controller John Chiang.

Last year his office issued warrants to taxpayers and vendors amid a budget standoff to preserve cash for priority bills, including payments to investors holding state debt.

State officials don't want to a repeat that embarrassing episode. "We needed to make the move. We didn't relish it by any means but it had to be done to protect our cash flow situation," said Tom Dresslar, spokesman for State Treasurer Bill Lockyer.

H.D. Palmer, Schwarzenegger's fiscal spokesman, said the state needs to hold onto the money because on Oct. 1 it has to pay $803 million in general obligation bond debt service.

"We have some pretty significant payments coming up," he said, noting Schwarzenegger and lawmakers continue to meet on a budget agreement, which should have been in place in mid-June.

 

WAITING ON A STATE BUDGET

The Republican governor and Democrat-led legislature must agree on how to fill a $19 billion deficit.

Schwarzenegger, backed by Republicans in the legislature minority, oppose tax increases. Democrats are seeking some new taxes to limit the spending cuts Schwarzenegger and Republicans propose as the primary tool for balancing the state's books.

Schwarzenegger plans to call lawmakers into a special session on the budget if they do not give him a spending plan before their regular session ends at the end of the month. "The legislature will have to come back to finish its job," said Schwarzenegger spokesman Aaron McLear.

Meanwhile, local officials are drawing up plans for how to cope without funds from Sacramento over the near term.

Steve Szalay, interim county executive for Sacramento County, said larger counties should be able to manage by dipping into special cash-flow reserves, but not for long.

"If it's deferred for a month or two then we can probably handle it. More than that and our cash flow problems will start getting significant," he said.

Los Angeles County oversees a $21 billion treasury pool and invests about $300 million daily at this time of year, so its liquidity is a cushion from the state's funding deferral, said Glenn Byers, a county assistant treasurer.

"We will have enough cash for the county, county school districts and county special districts," he said.

Santa Clara County Chief Operating Officer Gary Graves said that if the state budget remains in limbo through the fall -- some observers predict it may not be finished until after the November election -- local governments could move on to internal borrowing after depleting reserves.

"Obviously we hope we don't get to the point where we're literally lending ourselves cash," he said. "That's when it gets serious. That's when we feel we're in the danger zone."

Credit rating agencies -- for the moment -- are not concerned about the state's funding deferral, which they had anticipated.

"It's something that has to be carefully managed but it's not an insurmountable obstacle," said Alan Gibson, a director at Fitch Ratings. (Reporting by Jim Christie; Editing by Dan Grebler)