Finance Officials Say State Might Delay Paying Bills : Budget: Funds for schools, Medi-Cal and welfare may run out June 30, they warn. Controller downplays assessment.

SACRAMENTO —  The state, facing an anticipated $12.6-billion revenue shortfall over the next 15 months, is so cash short that it may run out of money to pay its bills by the end of the fiscal year on June 30, California finance officials disclosed Thursday.

These officials said they expect to have enough money to pay off $4.1 billion in loans from private financial institutions that are due in June. But they say that paying off the debt may leave the state’s financial cupboard bare and force even heavier borrowing activity. State Controller Gray Davis and the Department of Finance project that the state will end the fiscal year with a cash deficit of $4.5 billion to $4.9 billion in the general fund. This is the pool of money that is used to pay state operating expenses, provide financial aid to school districts and counties and meet welfare, Medi-Cal and payroll obligations.

Until Thursday, it was believed the state could cover these costs by borrowing from funds usually restricted to special uses, such as the rich state highway account.

But new budget figures by the Department of Finance show that, even after borrowing from dedicated accounts, the treasury still will be $349 million short.

On the basis of the finance department’s analysis, the controller’s office prepared a worst-case plan that anticipates delaying state bills due for payment in June. An internal memo warned that “other payments, constitutionally or statutorily protected, such as Medi-Cal, payroll (and) social welfare . . . will have to be delayed until sufficient cash is available.”

Davis’ staff tends to downplay the finance department’s analysis and believes the situation will not reach such a crisis. In fact, the controller’s office believes the state will have $84 million left from special funds after paying its bills. But with Gov. Pete Wilson and the Democratic-controlled Legislature bogged down in a political war of words over the budget, Davis conceded that the problem is severe.

“We are watching the situation hourly,” Davis said in telephone interview from Washington, where he was attending a meeting of the Council of Institutional Investors.

The controller said he and other officials are not going to know for certain how bad the situation is until personal income tax returns start coming in April 15.

“It’s clearly too early to panic,” Davis said. “We believe the Department of Finance is being overly pessimistic and that there will be sufficient funds against which we can legally borrow in order for the state to pay its bills.”

But, Davis conceded, “It will be very close.”

Department of Finance officials are anticipating that they may have to ask the Legislature for authority to borrow additional funds, deepening the financial quagmire and further complicating the budget problem faced by Wilson and the Legislature.

Cynthia Katz, assistant finance director, said the department’s top priority is to pay off the $4.1 billion owed to private financial institutions. Called revenue anticipation notes (RAN), the money was borrowed at the beginning of the fiscal year to get the state through the lean winter months when tax collections are traditionally low.

Katz said the state “will pay the RAN first.”

After that, the well may run dry. “We may have to go to the Legislature for the authority to borrow more,” she said. Katz also raised the possibility that payment of some of the state’s bills may be delayed “for a few days.”

“But we anticipate that we will be able to work through these problems by then,” she said, expressing optimism that the Legislature will act on the governor’s budget by the May 1 deadline set by Wilson.

To meet the shortfall, Wilson in January introduced a budget plan calling for about $2 billion in tax increases and $5 billion in cuts. Since then, a continued decline in state revenues caused by the recession has added another $5 billion to the potential deficit. Administration officials are preparing proposals for additional budget cuts and tax increases.

At the time the state borrowed the initial $4.1 billion, the state’s AAA credit rating was secure and the state could borrow at favorable interest rates. Restoring the state’s AAA credit rating had been a major achievement of Wilson’s predecessor, George Deukmejian, who liked to boast that he had taken the state from “I.O.U.” to “A-OK.”

While the state still has a AAA credit rating, it is shaky. In January, shortly after Wilson introduced his proposed $55.7-billion budget for the 1991-92 fiscal year, the credit-rating agency Standard & Poors put California on so-called “credit watch.” That served as a warning that the state’s worsening deficit could cause a downgrading of its credit-worthiness, which in turn would make money more expensive to borrow.

Peter Bianchini, a Standard & Poors executive based in San Francisco, said Thursday that his firm was not ready to drop California’s credit rating. He said recent developments were anticipated by Standard & Poors, which is why California was put on a credit watch.