State Strategies to Manage Budget Shortfalls

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Case Study: Trigger Legislation in California

As the 1990s began in California, so did a new era of financial hardship and budget deficits. In response, the legislature adopted a two-year plan in 1994 to eliminate the state's budget deficit by the end of the 1995-96 fiscal year. The financing of that plan included the sale of revenue anticipation warrants--short-term bonds that will be repaid from the state's future revenue collections. To ensure that the state would be able to meet its debt repayment obligations, the legislature enacted Chapter 135/94 (SB 1230)--known as "trigger legislation."

The legislation established a fiscal monitoring and adjustment process designed to guarantee that the state would have sufficient cash to repay the revenue anticipation warrants. Projection of a certain level of budget shortfall would "trigger" action to mitigate the shortfall. With the input of the legislative analyst (a legislative fiscal officer), the state controller was required:

To determine on Nov. 15, 1994, whether the general fund's anticipated year-end cash position had worsened by more than an acceptable amount; and
To determine on Oct. 15, 1995, whether available cash projected for the end of 1995-96 would fall short of the amount needed to repay external borrowing.

If the state controller determined that a shortfall of sufficient size was projected, the legislation directed the governor to propose new legislation that would provide for general fund expenditure reductions, revenue increases or both to offset the amount of the estimated 1995 or 1996 cash shortfalls. If legislation was not passed by Feb. 15 of the fiscal year, the director of finance would apply automatic across-the-board spending cuts to all general fund programs, except those protected by federal law or the state constitution (primarily K-14 school funding).

The trigger legislation required the legislative analyst to assist the state controller by providing an analysis of general fund revenues and expenditures and to review the state controller's estimate of the state's cash position within five working days of the determination. Under the trigger law, the state's cash position was measured by the estimated amount of "unused borrowable resources" remaining available to the general fund on June 30 of the fiscal year. Unused borrowable resources referred to total available borrowable resources on that date, less total cumulative loan balances on that date.

Borrowable resources consisted of internal borrowable resources (cash balances in special funds that the general fund may legally borrow) and external borrowable resources (such as the proceeds from the sale of revenue anticipation notes and warrants). The amount of unused borrowable resources is the difference between total borrowable resources and the amount of these resources that already has been borrowed by the general fund to finance its cash needs.

As it turned out, the trigger was not pulled in 1994-95 because on June 30, 1995, the state controller projected a $581 million improvement in California's general fund, and the legislative analyst agreed that the controller's estimate of the state's cash position was reasonable. This put the state well above the cash position that would have set off the trigger. Budget improvements in fiscal year 1995-96 also prevented the trigger from being pulled.

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Written December 1996, posted January 2003, reviewed December 2003
Email statebudget-info@ncsl.org for more information.
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