Due to a projected cash flow crisis, the state of California has asked to borrow $250 million and $200 million respectively, from the CSU and UC school systems in March.
In the beginning of February, the State Controller’s Office released a report detailing California’s revenue in January, which was $528 million below the latest projections contained in Gov. Jerry Brown’s proposed 2012-13 budget.
The report found that since the General Fund cash could potentially dip below the minimum safety level of $2.5 billion on Feb. 29, the State Controller’s Office worked with the Department of Finance and the Treasurer’s Office to develop a series of short-term cash solutions, including a temporary borrowing from the UC and CSU systems.
The CSU and UC were asked on Jan. 23 and 26, both institutions agreed to lend California the loan on Jan. 24 and Feb. 15 respectively. UC is expected to loan out $200 million, according to H.D. Palmer, deputy director for External Affairs at the California Department of Finance.
The CSU’s loan is said to be repaid by the end of April, with a 2 percent interest rate, which would yield about an additional $830,000 for the system over the next two months (March and April).
According to Palmer, the state will use the money to pay their bills in a timely manner.
“The CSU will not lose any money by loaning the state $250 million. It is a short term month loan and will pay them by April 27,” Palmer said. “In the end, the CSU school systems will gain more money than what they originally loaned out, so it is a win-win situation on both sides.”
CSU will get its funds from their short-term investments, according to Stephanie Thara, a spokesperson for CSU. Thara said CSU funds are allocated to various short-term investments, meaning the loan CSU is taking out to the state are coming from working capital monies that were previously in other investments outside the state treasury.
“There will be no ill effects on students or the university,” Thara said. “ The money will not come from student fees or any of CSU funding. ”
CSUN Vice President for Administration and Chief Fiscal Officer, Tom McCarron, said the loan arrangement benefits the state and CSU.
“Overall, I believe this is a favorable arrangement for the State of California and the CSU. The state pays lower interest costs compared to borrowing from external sources and the CSU receives a much better rate than we’re currently earning,” McCarron said. “So these additional funds do provide a little relief to our shrinking university budget.”
McCarron added that there will only be a lost opportunity cost for the external agencies that won’t be lending these funds to the State.
Nancy Virts, CSUN’s economic department chair, said the key word is opportunity cost-that is what return could the CSU have earned on the money if it did not loan it to the state.
“The risk of default on this particular loan is quite low. I doubt whether the CSU would lose any money on this,” Virts said. “Given that the loan is only for a month, it is unlikely to effect anyone at the CSU and it is certainly unrelated to any budget cuts that may or may not happen the latter.”
Tax revenue plays an important key role into deciding if services are to be cut, according to Virts.
“The money to fund CSU, like all state services come from taxes,” she said. “If tax revenue is less than the cost of providing services, either those receiving services must pay more or the level of services must be cut,” she said.
Eric Whelan, 22, a senior majoring in music industry studies, feels differently.
“Although it is good that CSU will get the money back. I feel that it is not the best time for CSU to loan the state of California money,” Whelan said. “ The CSU system has been through a lot and I hope they will get their money back as promised.”
But Dr. Shirly Svorny, a CSUN economics professor, said if CSU can earn more in interest on the money it lends to the state, than it could earn making an alternative investment with similar risk for the same length of time, then lending to the state will not affect CSU.
“The state pays less to borrow,” she said. “And the CSU earns more than it would earn if it were to lend to private borrowers.”