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California prepares to stop paying bills

Posted By Drew Zahn On 01/26/2009 @ 9:47 pm In Front Page | Comments Disabled


California State Controller John Chiang

The state of California has run out of money.

Facing a $42 billion budget deficit, State Controller John Chiang told the Sacramento Bee he has already borrowed $21.5 billion to try to cover the state’s checks, but by Feb. 1, there will be no more options left but to simply stop paying some of the bills – including tax refunds, welfare checks, student grants and other payments owned to California citizens.

“It pains me to pull this trigger,” Chiang said at a news conference held in his office. “But it is an action that is critically necessary.”

Federal law requires that many school and health-care programs – a total of about $6.6 billion in California – must be paid, the Los Angeles Times reports, so Chiang has announced an expected payment freeze on $3.7 billion worth of the state’s bills, most of it refunds owed to taxpayers.

But even with the freeze beginning next week, the Times reports, California will still fall $346 million short for the month of February, forcing Chiang to consider something only done once since the Great Depression: issuing IOUs.

Formally called “registered warrants,” the state’s IOUs consist of little more than a piece of paper that says the state owes a payee money, plus interest, to be paid at some point in the future.

The last time California issued registered warrants was in 1992, during two-month budget battle between then-Gov. Pete Wilson and the state’s legislators. But after the state issued almost $4 billion worth of IOUs, many banks stopped accepting them as deposits, claiming the five percent interest didn’t pay for the hassle of processing them.

The Times reports that state officials have already designed an IOU template for February and begun negotiating with banks to avoid a repeat of 1992′s problems.

Beth Mills, a spokeswoman for the California Bankers Association, however, told the Bee that the group’s members still have “a lot of technical and operational questions we’re trying to get some resolution on” about IOUs.

For now, state officials are hoping that Chiang’s promised payment freezes can delay the budget crisis long enough for Gov. Schwarzenegger and the Legislature to find a solution.

Among the $3.7 billion in payments Chiang has targeted to freeze include $1.91 billion in personal income tax refunds, $205 million in court operations, $122 million scheduled to help counties with welfare administration, $13 million in student aid and over $700 million in aid to various disabled and needy groups.

State officials also got a glimmer of hope last week when they learned that more than $11 billion of President Obama’s $825 billion economic stimulus plan may land in California’s coffers.

“This takes a big bite out of the state’s budget gap,” Jean Ross, executive director of the California Budget Project, told the Times. “It is better news than many of us had anticipated.”

Assembly Speaker Karen Bass, D-Los Angeles, however, warned that lawmakers can’t rely on Washington to fix the problem.

“We have to make really horrible cuts, and we have to raise revenue,” Bass told the Times. “We are just hoping whatever we get will help us avoid deeper cuts.”

If the cuts aren’t deep enough, California may be forced to consider issuing the IOUs. Continued borrowing, Chiang said, is not an option.

“We are the eighth largest economy,” Chiang said, speaking of California’s rank among the world’s nations, were it an independent country. But comparing it to other states, he said, “We have the 50th or we are tied for last in the credit ratings. We are a world economic power, but we have fiscal mismanagement in this state.”

 


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