Wednesday, July 1, 2009

California To Issue IOUs


The Sacramento Bee Reports Governor, lawmakers blow deadline as budget hole deepens

By allowing the fiscal year to end without trimming $3.3 billion from the 2008-09 education budget, lawmakers and Schwarzenegger lost the chance to cut spending in a manner considered crucial to bridging the $24 billion deficit.

Instead, Senate Republicans, Democrats and the GOP governor remained in a political standoff over other parts of the budget, particularly how much to slash health and welfare programs.

Without the education cut, state leaders face a more difficult challenge because they must find billions in new solutions after virtually exhausting their bag of budget tricks over the past year.

Tuesday's failure to cut education spending and shift redevelopment funds expanded the deficit overnight because of the way school funding formulas are calculated.

Schwarzenegger plans to declare a new state of fiscal emergency today, launch another special session and propose additional program cuts to solve the larger deficit problem, spokesman Aaron McLear said. The new deficit number will be roughly $26.3 billion, about $2 billion higher than the governor's May budget, according to Schwarzenegger's Department of Finance.

Absent a significant budget deal today, state Controller John Chiang has warned he must take the next step of issuing IOUs on Thursday to vendors who do business with the state, local governments and people who are owed tax refunds. Chiang said IOUs are necessary to preserve enough cash to meet constitutionally mandated obligations to schools and state bondholders in July.

"That's as good as money sir. Those are I.O.U.s" – Lloyd Christmas

Andrew Jeffrey writes for Minyanville California Finally Runs Out of Cash

Lawmakers appear blindsided. It's almost like the state went broke all of a sudden and they haven't had time to properly prepare a solution. Not true: The state has been in and out of financial crisis for more than a decade.

California politicians are a woeful bunch. Despite being home to some of the most profitable and innovative companies in the world, the state is perennially short of cash. Oracle (ORCL), Google (GOOG), and Genentech (DNA) all hail from the San Francisco Bay Area, while San Diego remains a mecca for biotechnology research and is home to mobile-communications giant Qualcomm (QCOM).

The state has vast natural-resource reserves, has a booming agricultural industry, is a popular tourist destination, and has some of the most heavily trafficked ports in the world. Good weather and generally high quality of life has made California the destination for dream-seekers for more than 150 years.

Yet, despite everything it has going for it, California's political process is a complete disaster. In an attempt to allow voters to play a more direct role in governance, the state's referendum system allows citizens to collect signatures and get measures onto statewide ballots. Enough votes on election day and any Californian can see his or her whimsical dream become law.

This has created a patchwork of legislation, rules, and special interests that have hogtied what would be the seventh-largest economy, were it to be a sovereign nation.

Minyan Peter adds: “I don't profess to know how this one will resolve itself. As an interim step, California has announced that it will be meeting its obligations using script -- IOUs. I don't know how long employees and vendors are willing to work for nothing more than a promise. But I do know that it's entirely unsustainable.”

Mish has long-offered: How To Balance The California Budget - You Decide

Clusterstock begs: Please, please, please let there be an after-market in these IOUs. We'd love to see how they're valued and how businesses will conduct exchange using them.”

What would a $100 IOU from the State of California trade for on the open market? $50? $25?