Budget Update: State IOU’s?

The Democrats failed to pass the first of 20 budget proposals yesterday (Wed 6/24).  Not that it would have been too much better otherwise, as this proposal addressed only $11 of the $24 billion problem. Gov. Schwarzenegger’s proposal addressed $16 billion, but received scrutiny for cutting programs for the poor, including the now infamous “900,000 children” that will be without state-funded health insurance. Republicans are more or less with the Governor- other than releasing prisoners and borrowing from local governments- while the Democrats wish to reduce the cuts and increase “sin” taxes (such as alcohol, cigarettes- I suppose “oil” and “cars” are sins now too…).

Unless these differences are dealt with and we hit the “magic number of $24 billion” (as Senate Pro Tem Steinberg says, Reuters), IOU’s may be issued July 2 for the first time since 1992 under Governor Pete Wilson, who issued warrants for the first time since the Great Depression.  The 1992 act immediately drew lawsuits for violating the federal Fair Labor Standards Act and costs the state $558 million.  Still, the act may be necessary, considering State Controller John Chaing said in a written statement that we will start the fiscal year next Wednesday “with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression.” He considers the warrants a very real possibility. If warrants (IOU’s) are issued, most state workers will not receive a “registered” warrant, which accumulates interest and is redeemable October 1, 2009, according to the State Controller’s website), but rather they will receive a regular warrant.

Registered warrants will most likely be used for private businesses, paying back local governments and income tax returns.  They will accrue interest at a rate not yet determined.  “Regular” warrants are redeemable by the State Treasurer; therefore most financial institutions will accept them. “Unfortunately, the state’s inability to balance its checkbook will now mean short-changing taxpayers, local governments and small businesses,” Chaing says, NY Times. There have been studies that suggest increased state spending and government expansion (see previous post for example) is the root of the problem, not merely the complex economic crisis- which should have been anything but unforeseen.  Although the State and Assembly scheduled a meeting this morning (Thursday), it is unclear what they will accomplish (Mercury News). State credit is at risk, as Standard & Poor’s warned that it may downgrade the California economic recovery sales tax bonds, given the problems the state is likely to face (Reuters).

If the Democrats pass their budget revisions with a simple majority vote it will take 90 days to go into effect, which may prove pointless considering the expenditures.  “IOU’s are almost an admission of guilt that we can’t pay our bills,” said Chaing’s spokesman (LA Times). “Almost?”  Where’s the ambiguity? The legislature is ambiguous, however, according to Assemblyman Jim Nielsen, as he wonders how the people will have a clue as to what’s going on when they don’t- in reference to the inches-thick bill they received an hour before the debate.  One bill “would allow the California Lottery and State Compensation Insurance Fund to invest in financial instruments the state issues to raise cash,” a mystery even to Assemblyman Nielsen, Sac Bee reports.